Bull markets can be deadly. Despite showering nearly all investors with stock market gains, bull markets also create a very dangerous and potentially harmful precedent.
Bull markets can make anyone, even the waiter at a local restaurant, feel like a sophisticated investment professional. Investing is a profession in which, under the right market conditions, a complete novice can beat a pro for a year or more. Even on your best day at the golf course, you won't beat a golf professional over a round of golf.
But in investing, novices can beat pros all the time during bull markets, and that confidence causes bull markets to last longer. In the end, the professional investor will win, but in the interim, bull markets can dangerous, as they dish out a dose of misguided confidence.
So I say that when markets get frothy, follow the leaders -- the best investors -- to minimize investment damage. The best investors are surely not immune to market losses, but there is a reason Warren Buffett, Seth Klarman, Carl Icahn, Mason Hawkins, Marty Whitman, Bruce Berkowitz, Bill Ackman and others have been around for years. They are making far more money than they are losing.
Sometimes, it's hard to follow the best. Seth Klarman is known for making esoteric bets. Recently he parked several hundred million dollars in Spanish commercial real estate, a bet most of us can't make. But he does still have a $1 billion investment in Micron Technologies (MU), a semiconductor company that trades for 10x earnings. Bill Ackman has made some splashy news recently with his $4 billion on Allergan (AGN), which is up over 20% in the past week on the news of the bid. Ackman also has bets on Fannie Mae (FNMA) and Freddie Mac (FMCC). Bruce Berkowitz also holds a massive stake in the preferred shares of those two companies.
IBM (IBM) has not been an investment darling recently, but that hasn't changed Buffett's $10 billion bet on IBM. ValueAct Capital was public in its investment of Microsoft (MSFT) last year, and since then the stock is up over 20%.
Investors often try to make things harder on themselves than they need to be. There are no penalties for being a copycat or "stealing" another's idea for your portfolio. Clone from the best, and you will enhance your odds of being around longer with more capital to your name.