Exactly one year ago, I wrote a piece about the hypothesis that “markets are always ahead” of the real economy. At that time, I said that empirical evidence suggests that stock markets can indicate the future prospects of the broader economy. That stock prices decline before deterioration in the general economy and vice-versa. If you keep a close watch on stock prices, it will help you not only with your financial investments but also with your business plans.

Back then, I was of the view that markets were overvalued and in a state of unnecessary exuberance. Could this have meant a turnaround soon in the broad economy?

You can read that full article here – BSE Sensex 30 vs. Economy – Wealth effect?

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Over the course of the last one year, stock prices have soared beyond their historic highs and there is an evident revival in the general economic environment. Housing markets in the U.S., where the 2008 recession started are finally stabilizing. Fund houses in India are predicting 12-15% rise in corporate profits over the next 12 months. People are paying a lot more for travel and accommodation over last year.

I am sure that by now you have figured my views on the merits of long term investing and have realized the cynicism with which I have approached stocks over the last few quarters. That said, after a long time, I am beginning to get a sense of conviction about buying stocks for the next bull market.

I have written extensively about economic cycles and have often advocated that “it is extremely difficult to lose money in stocks” if one stays disciplined and looks at the broader economy before investing. Once you cover these two areas and select a portfolio of stocks with common sense, you will make a lot of money.

State of the current economy and the next bull market

While their exact projections may differ, analysts and economists are unanimous in their view that Indian GDP will grow anywhere between 5-7%. This coupled with the evidence of cyclical price patterns of stocks is good enough indication that we are heading towards the next bull market. Of course it will take time before a larger number of investors start getting drawn towards stocks again. At the peak of investor interest (i.e. when most investors would have brought in), the markets will again crash in the absence of new money flowing into stocks. It’s the same every single time.

While you can keep track of the various macroeconomic indicators to try and get your timing right (i.e. to try and buy stocks just before the next bull market starts). Be assured that markets don’t often give you a chance to enter at the bottom or exit at the peak. The right time to prepare for the next bull market is right now. Yes, as soon as you finish reading this!

You will find thousands of theories and loads of discussion ranging from the impact which the Indian general elections of 2014 will have on stock markets to concepts as bizarre as 17.5 year cyclical bear market coming to an end. I will say something a little more rational and sensible than that – Follow 3 steps and you will make a lot of money over time:

  1. Look for high quality stocks which are currently trading below their true worth.
  2. Buy them.
  3. Wait for them to appreciate.