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Don’t Let Bull Market Convince You That You Are Smart

By Vitaliy Katsenelson, CFA
February 24, 2007

Lately I’ve been getting this powerful feeling that everything I touch turns to gold. Every time I buy a stock, it goes up. Did I finally figure out the stock market game? Did I find a secret to Will Rogers’ advice? Buy stocks that go up, and if they don’t go up, don’t buy them.

No, I didn’t get much smarter, and my stock picking skills haven’t improved that much over the past year. I was simply a willing participant in the latest (cyclical) bull market. A bull market makes you feel smarter than you are the same way a bear market makes you feel dumber than you are. Feeling smart makes you do the opposite of what you should be doing. The euphoria of the golden touch is a dangerous thing because it can make you (and me) careless. We forget about risk since we haven’t seen it in a while and focus only on our rewards. You have to actively make yourself aware of the four-letter word R-I-S-K!

How do you do that? My favorite way is to remind myself how “dumb” I am. I pull out an annual return report of a company on which I lost a boatload of money and masochistically try to read it from cover to cover, reliving my “dumbness.”