Other Bull Market Risks

“There are some frauds so well conducted that it would be stupidity not to be deceived by them.” – Charles Cotton

With stocks reasonable priced (some say undervalued, some say overvalued, so I’ll take the middle ground) and interest rates on bonds at generational lows we are stuck in a T.I.N.A. market (there is no alternative.

Central banks around the world are trying to get you to take risks by printing money and keeping interest rates low. It has worked to the tune of double-digit returns in equity markets since the beginning of the year, not to mention the gains from the previous four years.

Many investors talk about taking money off the table or increasing their bets during a bull market. But there are other risks to think about besides missing out on a correction or a further leg higher in the stock market.

One risk that most do not consider is the fact that the occurrence of fraud increases during bull markets. It’s easier to talk people into “safe” or “guaranteed” investments when they are feeling good. Overconfidence sets in and investors assume they can do no wrong. This is a dangerous stance to take.

There is a reason Bernie Madoff’s Ponzi scheme was discovered during the depths of the most recent bear market and not at the market peak. When people are pessimistic they look for things to go wrong.

Noted short seller, Jim Chanos, discusses this phenomenon in a recent interview:

“What we find is that the greatest clustering of fraud in the financial markets occurs, as you might imagine, during and immediately after the biggest bull markets. As I like to tell my students, it’s basically a period in which people suspend their disbelief. Everybody’s getting rich and it becomes increasingly easy to sell more questionable schemes and investments to investors.”

Another risk to worry about during bull markets is the flood of new products that make extreme promises. Banks and brokers love to come up with fancy new products that promise a guaranteed return, lower risk with higher return, low volatility, higher yield with similar risk and the chance for downside protection with no cap on the upside.

Be wary when you hear these terms. Sure, some of them might do what they say but more than likely they will come with very high and possibly hidden fees. Generally, the more complex an investment product, the worse off it will be for the customer. That means whoever is selling it will have the most to gain on the transaction.

Remember that the next time a financial advisor, broker or next door neighbor tries to push the newest investment fad on you. Keep it simple and look for investments with low costs and high quality. Complex does not equal smart, especially for an investment.

Source:
Wall Street power player: We’re incentivized to cheat