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How to Get Rich in the New Bull Market

By Sean Williams – Jun 11, 2020 at 4:51AM

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Follow these easy steps to make money and sleep well.

For the past four months, the stock market has tested the resolve of investors like never before. Panic and uncertainty tied to the coronavirus disease 2019 (COVID-19) pandemic sent stocks cratering in mid-February and throughout most of March. In total, the benchmark S&P 500 (^GSPC -0.21%) lost 34% in just over a month, marking its quickest descent into bear market territory (as well as a 30%+ decline) in history.

And yet, the market has rebounded almost as ferociously as it fell. Over the past 11 weeks, the S&P 500 has retraced about 80% of what was lost from its February 19 closing high. COVID-19 may have put an end to the 11-year bull market, but a brand-new bull market looks to have already taken its place.

If you're looking to take firm hold of your financial future, here are few things you need to know about how to get rich in a new bull market.

A businessman holding two large stacks of cash.

Image source: Getty Images.

Don't skimp on the growth stocks

The first thing you're going to want to do is ensure that you're not overlooking fast-growing companies.

Historically speaking, value stocks have trumped growth stocks over the long run. A 2016 report from Bank of America/Merrill Lynch found that value stocks delivered average annual gains of 17% between 1926 and 2015, compared to 12.6% for growth stocks.

But keep in mind that the economic variables today are very different than they were for much of the 90 years that BofA/Merrill Lynch examined. Since December 2008, the Federal Reserve has had its federal funds target rate pegged to an all-time low of 0% to 0.25% on two separate occasions. The Fed's dovish monetary policy is designed to encourage lending by making borrowing inexpensive. For growth-oriented companies, it's a wide-open door just begging for them to borrow in order to create jobs, innovate, and, in general, expand.

To be perfectly clear, this doesn't mean avoid value stocks, nor does it draw a line in the sand between growth and value -- companies can be both growth and value stocks. It simply means that when you're looking for companies to add to your portfolio, make sure you're not being too conservative with your approach.

A surgeon holding a one dollar bill with surgical forceps.

Image source: Getty Images.

Seek out game-changing businesses with strong moats

Next, but building on the previous point, you're going to want to purchase companies that offer game-changing potential and have sustainable competitive advantages. Note that perceived-to-be game-changers are rarely cheap from a fundamental perspective, but their premiums are often well-deserved.

For instance, surgical system developer Intuitive Surgical (ISRG -0.83%) is currently valued at 45 times next year's per-share earnings forecast, which is incredibly high for medical-device maker. But the thing is, Intuitive Surgical isn't just your run-of-the-mill device maker. It's responsible for the nearly 5,700 da Vinci surgical systems that have been installed in hospitals and surgical centers around the globe over the past two decades. It's a company that has incredible rapport with surgeons in the medical community, a virtually insurmountable lead in surgical systems installed, and is built on the razor-and-blades business model, meaning its margins only get better over time.

Likewise, Square (SQ 1.74%) in the financial technology space is carving out its own path to prosperity. Despite the payment processing industry being dominated by a small number of companies for decades, Square has had success courting small, medium, and even large businesses to its seller ecosystem. More importantly, growth for its Cash App is off the charts, with gross profit up 115% year-over-year during the pandemic-impacted first quarter. The ability to link Cash App to Cash Card (a debit card that draws down from your Cash App balance), as well as invest directly from Cash App, has helped more than triple monthly active users in a two-year stretch.

A businessman holding a stopwatch behind an ascending stack of coins.

Image source: Getty Images.

Stick with your holdings for long periods of time

You might get tired of hearing it, but it needs to be said: Hold onto your investments.

Since the beginning of 1950, there have been 38 separate instances where the S&P 500 has declined by at least 10% on a non-rounded basis (i.e., an official correction). With the exception of the COVID-19 bear market nosedive, each and every correction was eventually put into the rearview mirror by bull-market rallies. If you bought great companies and held, chances are you're up on your investments over the long run.

Another way to look at this is a battle between the two "E's"... emotions and earnings. Emotions may have the ability to manipulate the valuations of companies to the upside and downside in the short-term, but they have no bearing on long-term performance. Over the long run, it's operating performance that drives share-price appreciation. If your investment thesis isn't altered by a correction, there's no justification in selling.

We'd all love to get rich quick. But the reality is that getting rich the right way involves buying great companies and sticking with them for long periods of time.

A hand reaching for a neat stack of one hundred dollar bills in a mouse trap.

Image source: Getty Images.

Avoid the temptation of margin

Finally, you're going to need to be able to survive the volatile swings that accompany brand-new bull markets, if you want to get rich. This means staying as far away from margin as possible.

Understandably, if you're a seasoned investor who wants to short-sell, the use of margin is inevitable. But purposefully levering your portfolio in a new bull market can prove disastrous.

As an example, between the March 2009 low in the S&P 500 and the end of 2012, the broad-based index underwent corrections of 16%, 19.4%, 9.8%, 9.9%, and 7.7%.  If you have no margin, these are easily survivable corrections in the stock market. But if you've leveraged your portfolio in any meaningful way in an effort to "time the market," you could be stopped out for huge losses or forced to sell at a big loss if things don't go your way in the short run.

Be mindful of how you're investing your capital and avoid the use of margin, if at all possible.

Sean Williams owns shares of Bank of America, Intuitive Surgical, and Square. The Motley Fool owns shares of and recommends Intuitive Surgical and Square and recommends the following options: short September 2020 $70 puts on Square. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Intuitive Surgical, Inc. Stock Quote
Intuitive Surgical, Inc.
ISRG
$186.38 (-0.83%) $-1.55
Block, Inc. Stock Quote
Block, Inc.
SQ
$55.08 (1.74%) $0.94
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
^GSPC
$3,647.29 (-0.21%) $-7.75

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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