WOULD you invest in a company that has not made a single peso in the past five years?  I know it’s crazy, but I see it every day. Investors buy and sell stocks like there is no tomorrow.

I know of a trader who, in the span of one hour of trading, bought and sold five companies for himself. Chasing the trade is like running with the bulls.  I know because I’ve experienced both. The truth is, there is a safe way to run with the bulls and a risky way to do so. No matter what, your adrenaline will be pumping, your senses will be heightened, and it will be fun as hell, but make one mistake (especially on the risky path) and you could be dead.

I know you can make a lot of money by day trading but this is risky stuff. I’m not a big fan of this type of investing. You need to be as lucky as you are good. I personally don’t like the stress that comes with the territory. Selecting good companies to invest in is a difficult job as it is. In my mind, trying to figure out if I should sell my shares at 10:45am so I can buy them back at 11:30am is asking for the impossible. What may be a more practical and safer approach is to first understand what part of the market cycle we are at, then develop a priority list of questions to address, before taking the plunge in a certain company.

There are five phases to a market cycle. The first phase is called the bottoming phase.  This is when the market tanks and when decisions are mostly driven by emotion and psychology.  There is a feeling of disbelief. The most overused statement is “I should have…” Investors would be licking their wounds. Valuations would be attractive but generally ignored because investors have just been gored by the bull. People are afraid and it takes a while to get back in the ring. I think we went through this phase in 2008.  The good news is that if you survived the bottoming phase chances of recovery are good.

The second stage of a market cycle is the early recovery phase (2009 to 2010). The survivors are rewarded. Focus moves to companies that have managed through the bottoming phase and are still on stable ground and making money.  Bargains are abundant. In this part of the cycle, disbelief turns to doubt, then reflection, and finally conversion. For the brave, the bull looks tame. It’s time to go long again. It’s time to jump back in the ring.

The third phase of the market cycle is the mid-stage bull market. This is where I think we are today. The most challenging part of this phase of the cycle is to pick stocks that can continue to deliver the earnings growth in order to justify their higher valuations.  Investors are quick to pull the trigger. They are willing to pay up for companies that deliver this growth while they will be fast to sell those that disappoint. Bargains are hard to come by as prices have moved higher from the earlier part of the cycle and the market psychology hinges on faith and hope that companies will deliver the goods.  Since I feel we are in the early stages of this phase, I think it is important to focus on companies that are delivering earnings growth consistently and with a plan do this for the long term. I also feel you should select companies that share the wealth they create with their shareholders in form of cash dividends.

I think that one way to become a better stock picker is to have a system or process that you follow every time you are considering an investment in a stock.  A simple approach would be to have a priority checklist of questions for the current phase you believe the market to be in. The reason why you need different sets of questions is that one approach will not work for all phases of the market cycles.

Some of the questions I would consider for the current phase of the market cycle are: Do I understand the business? Is management capable?  Is there enough cash flow to deliver earnings growth?  Are earnings growing?  Do they pay dividends?  If you developed a disciplined approach, you will greatly reduce your stress levels and better understand the companies you are buying.  You will also have a lot more fun because you will have more wins than losses.

The last two stages of the market cycle are the peak of the bull followed by the bear market. This is when euphoria and greed quickly turn to fear and panic. We are certainly in a bull market today but I think we are nowhere near the peak. Valuations are high but not excessively so. Companies are financially stronger than they have ever been and in many cases delivering record profits to shareholders. In most companies, debt levels are very manageable. Our currency has been strengthening and commodity prices are beginning to consolidate, which should temper runaway inflation fears. There is optimism in the air, but it is guarded optimism not over-optimism.

The bull may be taking a break but get ready to run by him again as he is still nowhere near the bull fighter who will eventually kill him.

(The author is the investment director for equity portfolio management for ATR KimEng Asset Management and chairman of its investment committee. For comments, you may e-mail him at  This e-mail address is being protected from spambots. You need JavaScript enabled to view it .)