Denial, acceptance, or exuberance?
On the stock market, we can distinguish three clear phases during a bull market (a period of rising prices):
Denial
In this phase, the bull market still needs to be acknowledged. The recent correction is still fresh in memory, and most investors remain pessimistic. However, money gradually begins shifting from defensive investments to assets with higher return potential. These moves are often deliberate and based on extensive analysis.
Acceptance
Investors recognize that the market is in an upward trend, and it seems unproblematic. Optimism increases, and stock prices often rise simply because they keep rising. Analysts and fund managers, mindful of their careers, align with the crowd.
The upward trend continues, with small corrections and dips quickly recovered. Even a temporary downward move proves short-lived.
Exuberance
In the final phase, the belief that prices will only continue to rise dominates. The idea that anyone who stays invested long enough will always profit becomes widespread. Studies supporting this view are eagerly cited. However, the fact that many investors actually close their positions after a 20% or greater decline remains underemphasized.
As earlier dips and corrections were weathered with little damage, confidence grows. Moreover, significant profits have been made, making investing seem easy. Greed and complacency take over.
For the U.S. market, this last phase appears to be underway. How long it will last, however, is anyone's guess.
Or, as John Templeton put it:
“Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.”
Based on his categorization of bull markets, the U.S. has clearly moved beyond the first two phases. What I see is euphoria. Do you agree, or do you think it’s still limited to optimism?
Even in earlier bull markets, the euphoric phase always came with enough arguments to justify further market increases. Today is no different:
AI will transform the world, making large companies even more profitable.
Trump is good for business.
The economy remains strong, with low unemployment and falling interest rates.
While the arguments vary with each bull market, one thing remains constant: human nature. Emotions always play a big role, and these emotions can shift quickly.
Ultimately, it’s almost always a sudden lack of liquidity that causes a market crash. And now you might wonder: how can there be a liquidity shortage when governments and central banks have proven willing to inject massive amounts of money into the system?
The answer is simple: no one knows. That’s why we call them “black swan events” – events no one sees coming. If we did, they wouldn’t be black swans. We would anticipate them and possibly neutralize their impact.
The real question is whether massive money injections would still have the same effect today. Can governments afford such additional debt with current higher interest rates?
Because a crash cannot be predicted – especially not its timing – the only option is to prepare for it. Crashes are a natural part of the market cycle and occur periodically.
An egg or a tennis ball
I find Gautam Baid’s visual metaphor in The Joys of Compounding particularly fitting. Imagine holding tennis balls (high-quality companies) instead of eggs (weak, poorly performing companies). During a crash, both fall, but while the eggs shatter, the tennis balls bounce back.
Baid rightly emphasizes quality companies. However, the challenge today is that such companies – or at least those currently defined as “quality” – have become very expensive. They will indeed rebound, but it could take a decade to break even. We’ve seen this before in similar circumstances.
There’s also safety in companies with substantial tangible assets and low debt. By today’s standards, these aren’t considered high-quality because everything revolves around returns. Yet profitable companies with lower margins, very low debt, and significant fixed assets are often solid and resilient. These too are tennis balls: they bounce back instead of breaking like eggs.
If you search for such companies in Europe and among small caps, they often don’t fall far – or are already on the ground, ready to re-enter the game.
What remains after a bear market – your foundation for future investments – is ultimately much more important than what you earn in a bull market.
Or, as Charlie Munger aptly puts it:
“People are trying to be smart. All I’m trying to do is not be idiotic, but it’s harder than most people think.”
PS: The consensus is that Europe is a museum for tourists, while America is where the future is being built. The concept of contrarian investing has become very clear, but that doesn’t make it any easier.
Still, it seems we are looking at a truly exceptional opportunity—often referred to as a “generational event.”
At Valuing Dutchman, We focus on undervalued but solid European companies, often family-owned businesses. We can’t predict exactly when the turnaround will happen, but what we can do is prepare for it.
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