What exactly is a bull market mindset?
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Introduction: At present, "bull market thinking" has gradually become a buzzword among institutional investors, but what exactly is "bull market thinking"? We systematically analyzed the "investment strategy and operations analysis" sections of more than 70,000 quarterly reports of active equity funds during four rounds of bull markets from 2008 to 2021 with the help of AI (sample periods: 2008 Q4–2009 Q2, 2014 Q2–2015 Q2, 2016 Q1–2017 Q4, 2019 Q1–2021 Q4), and distilled the core experience of "bull market thinking." Through fund managers' trading notes, we broke down "bull market thinking" into practical approaches such as asset allocation, position management, market timing, stock selection, and sector allocation, to provide practical experience for current investors. Especially considering that nearly half of current active equity public fund managers have only gone through one bull-bear cycle, various investor emotions such as forced buying, excitement, anxiety, and confidence can be further amplified in a bull market. (Note: The fund quarterly reports of the sample periods were input into the AI in batches, then summarized, merged, and organized; in addition, to reduce AI hallucinations and descriptive errors, we performed a manual check and revision of the content generated.)
Mindset 1: Investment strategy shifts from "conservative defense" to "active offense", flexibly adjusting positions and structure
Mindset 2: The initial phase of the bull market is driven by valuation repair, while profits determine its sustainability and extent
Mindset 3: Leveraged funds are the "accelerator" and risk "amplifier" in a bull market
Mindset 4: Maintaining a high equity position—positioning outweighs timing in a bull market
Mindset 5: Incremental funds of different attributes have a profound impact on the valuation system
Mindset 6: Seize the main line—each bull market has clear industrial themes and leading sectors
Mindset 7: Distinguishing "storytelling" from "earnings": the profit drivers are different under each bull market
Mindset 8: Respect the market and be willing to adjust—investing is the continuous optimization of decisions amid uncertainty
Mindset 9: Bull markets reshape valuation systems, but beware of "pseudo-growth" and stick to fundamentals
Mindset 10: The definition of quality companies does not change, but the requirement for a "good price" keeps rising
Main Text
Mindset 1: Investment strategy shifts from "conservative defense" to "active offense", flexibly adjusting positions and structure
When the market transitions from bear to bull, investment strategy needs to be flexible, shifting from defensive thinking in a bear market to offensive thinking in a bull market. At the end of a bear market, controlling positions and focusing on defensive sectors is common practice. However, once the market enters a bull market, the environment changes greatly; if you continue to stick to low positions and defensive names, you may miss out on the gains during the rally. How to adjust? For example, you can gradually raise equity exposure to participate in the rebound, and at the same time adjust portfolio structure, such as moderately reducing holdings of defensive assets (which were resilient but less flexible) and increasing allocation to offensive names with more potential upside, to make the portfolio more sensitive to market trends. This shift from "defensive" to "offensive" is often the key to keeping pace with a bull market.
Mindset 2: The initial phase of the bull market is driven by valuation repair, while profits determine its sustainability and extent
Bull markets usually have two phases: first, a liquidity-driven phase of valuation repair; then, an earnings-driven rally. In the early stage of a bull market, especially when there is no clear economic recovery, the main driving force is not earnings improvement, but an uplift in valuations fueled by abundant liquidity and better macro expectations. The rise in this phase does not rely on current earnings, but rather "discounts" future recovery. However, once valuations reach a certain level, whether the market transitions from a "fast bull, short bull" to a "long bull, slow bull" depends on corporate profits keeping pace. If economic recovery is confirmed and profits pick up, the bull market enters a healthier and more durable phase; if not, a rally sustained only by liquidity lacks longevity.
Mindset 3: Leveraged funds are the "accelerator" and risk "amplifier" in a bull market
The deep involvement of leveraged funds is a key feature that sets a bull market apart and is the reason for sharp, rapid rallies. Margin trading and off-balance-sheet leverage inject enormous buying power into the market. The nature of leveraged funds is "chasing up and selling down": in rallies, they magnify the money-making effect, attracting more capital and creating positive feedback loops; in downturns, they accelerate losses and market drops due to forced unwinding, amplifying market swings and risks. Thus, tracking the size of leveraged funds, like outstanding margin balances, is crucial to gauging the strength, pace, and potential fragility of a bull market. When leveraged funds explode in size in the short term, this boosts gains and accelerates the rise, but is also the root of future risks.
Mindset 4: Maintaining a high equity position—positioning outweighs timing in a bull market
When the macro economy is favorable and liquidity is loose during a bull market, it is advisable to keep a positive equity allocation and avoid missing out by overemphasizing market timing. In a clear bull trend, the biggest risk is missing the rally, not a pullback. Frequently trading positions and trying to "sell high, buy low" is extremely difficult and often leads to mistakes on both ends. Once you are confident in the medium- and long-term market trend, maintain relatively stable high exposure, focusing on optimizing portfolio structure—adjusting sector allocation and stock selection to handle short-term volatility or style shifts.
Mindset 5: Incremental funds of different attributes have a profound impact on the valuation system
Incremental funds with different investment preferences and behaviors profoundly reshape market valuations during bull markets. For example, from 2016–18, foreign capital continually entered the A-share market, favoring low-valuation, high-ROE blue chips, pushing up the valuation of "beautiful 50" style stocks. In 2019–21, mass issuance and inflows to public equity funds fueled structural rallies in "new infrastructure and military" growth sectors. Public funds generally favor industry prosperity and growth potential, concentrating on high-growth sectors, while their continual inflows reinforce capital advantages and valuation premiums in these segments. In summary, the source and nature of incremental funds each bull market directly impact prevailing style and valuation system.
Mindset 6: Seize the main line—each bull market has clear industrial themes and leading sectors
Capturing the clearest industrial theme is often key for excess returns. Every A-share bull market has distinct industrial leaders and "bull market flagships," reflecting macro policy, tech revolutions, and economic transition trends. Despite different broad contexts each cycle, funds always focus on sectors with higher prosperity and clearer growth prospects. For example, the 2005–07 bull was driven by global prosperity and local reform, with coal, metals, finance, and real estate as key themes; the 2014–15 "leverage bull" saw mobile Internet innovation and loose policy catalyze TMT’s rally; the 2019–21 "structural bull" was led by consumption upgrades and "dual carbon" policy, with liquor, healthcare, and new energy surging ahead. These show that syncing with the times’ industrial trends is the most explosive theme of any bull market.
Mindset 7: Distinguish "storytelling" versus "earnings": under different bull market drivers, the source of profits differs
At different phases of the bull market, the core driving logic of investment shapes market preferences. When liquidity is the main driver, excess funds inflate valuations and create a "liquidity bull," with the market chasing narratives and policy themes, rapid sector rotation, and faster expansion of valuations versus earnings improvement—what’s called a "valuation pull." Bull markets built on economic recovery and corporate profit growth focus on sustained earnings delivery. Investors look for fundamental improvement, sector prosperity, and valuation matching. For instance, during the 2014–15 liquidity-driven bull, concepts like "Internet+" drew sky-high valuations; during the post-2017 fundamentals-driven bull, investors paid for certainty in earnings growth. In summary, profits in liquidity-driven bulls come from premium and sentiment, while in fundamentals-driven bulls, returns come from both profit growth and valuation repair.
Mindset 8: Respect the market and be willing to adjust—investing is continuous optimization amid uncertainty
The market is correct most of the time and often exceeds expectations. Investing is a process of constantly testing and revising one's own views, rather than expecting the market to match your predictions. Many excellent fund managers have admitted in reports to errors in judging market style, pace, or themes, but the key is their ability to promptly adjust portfolios for new environments. Being realistic and flexible is often more important than trying to be right every time. The crux of investing may not be to always forecast accurately, but to keep exploring and making relatively optimized decisions amid change, while maintaining an open and learning attitude.
Mindset 9: Bull markets reshape valuation systems, but beware of "pseudo-growth" and stick to fundamentals
During bull markets, especially for emerging industries, traditional valuation metrics like P/E and P/B often "fail." Fund managers observed widespread adoption of new metrics—such as price-to-sales, market cap, user numbers, or traffic—for pricing new industry firms. This is partly rational, reflecting recognition of business models and future potential. However, this restructuring can be abused, leading to indiscriminate high valuations for companies lacking core strengths—i.e., "pseudo-growth" names relying purely on storytelling. Thus, managers both embrace innovation and stress distinguishing truth from hype, seeking truly profitable, competitively advantaged "real growth" firms. When the tide recedes, only those with solid fundamentals traverse the cycle.
Mindset 10: The definition of quality companies does not change, but the requirement for a "good price" keeps rising
Investing in leading companies with excellent business models, clear competitive landscape, and sound governance is the foundation of value investing, suitable for all bull market phases. However, sharp corrections remind everyone that a "good company" does not equal a "good stock," and good companies still need good prices. After valuations surge, many quality firms' prices may reflect overly optimistic expectations, losing an attractive risk-reward ratio. Thus, investing requires discipline on both quality and price. When crowding and valuation excess become extreme for a style or asset, risk is close by. Searching for quality at reasonable valuations on a broader scale is perhaps the required lesson in the second half of a bull market.
Authors: Yao Pei, Cai Yuyang. Source: Yao Pei Strategy Exploration, original title: "What Exactly Is Bull Market Thinking?"
Risk Warning and DisclaimerThere are risks in the market and investments should be made cautiously. This article does not constitute individual investment advice, nor does it consider any user's unique investment goals, financial situation, or needs. Users should consider whether any opinions, views, or conclusions in this article fit their own circumstances. Investment based on this content is at your own risk. ```