After years of running with the bulls, is the bear market coming out of hibernation?
Survivalists say that if a bear attacks, play dead! In the second half of 2014 we’ve watched the bear market poke its head up here and there like a game of market “Whack-a-Mole”. But after almost five years, is the bear really coming out of hibernation or are surges and pullbacks the new normal?
What is a Bear Market?
A Bear Market is a period when the prices of securities are falling and there is overall continued pessimism in the markets. As investors anticipate more losses in a bear market, selling continues. A downturn of 20% or more in multiple market indexes (like Down Jones and S&P 500) over a two month period is considered the start of a bear market.
The Market since 2000
Since the beginning of this century, the market has survived a number of bear attacks. Starting off in 2000 with the burst of the Dot Com bubble, bear markets followed the 9/11 attacks in 2001, and again during the subprime mortgage crisis of 2008. Fourteen years later, even after fifteen years of historically seismic events, the Dow Jones and S&P 500 hit record highs, and the Nasdaq boasted a 14 year high. But investors are human, and fear or pessimism can affect the market at anytime. And with big world events converging at one time, like Russian antagonism in Europe, the rise of new militant groups in the Middle East or the threat of a world pandemic, there are legitimate reasons for investors to pull back for a while. But is it really a bear attack?
A bear market and a correction can look and feel the same. The difference is a correction is a short term trend that lasts less than two months. For many investors, corrections are welcomed. Corrections can be a great opportunity to add good solid stocks to portfolios at value prices. A bear market can be a bit trickier to capitalize on because it is difficult to time good entry points.
For a long-term investor, a true bear market can make even the savviest investor wince. The truth is that no one, despite what they may espouse, can predict the top or the bottom of the market. And stocks are fair-weather friends. They can perform beautifully over an extended period of time until one bad earnings report makes them less attractive in a blink of an eye. But what goes down does come up, as long as the investment is solid. Trends, fads and unproven investments will always provide the greatest risk. And as always, balanced asset allocation is the key to long-term investing in any type of market.
What would Warren do?
When a bear attacks, he plays dead…, or he buys. There’s a reason why Warren Buffet was the most successful investor of the 20th century. Buffet rarely changes his long-term value investment strategy. He also sees down markets as an opportunity to buy good companies at good prices. His definition of “good” is determined by evaluating the quality of the business and whether he sees them with a durable competitive advantage. He also believes in investing when share prices are depressed and others are selling. As the saying goes, one man’s trash is another man’s treasure.
Dealing with Uncertainty
We understand logical events that make the market move in one direction or another. Reasons like a Federal Reserve decision, job reports, and growth or losses in the economy are easy to comprehend. But most of the time, the dance between the news of the day and movement is a lot more nuanced. Sometimes investors are just feeling edgy. Sometimes they feel the time is right to take their profits, scrape their gains or perform tax loss harvesting. In other words, sometimes there is no good reason at all.
Investing is not a predictable science. Warren Buffet once described the market perfectly. He said, “In the short term, the market is a popularity contest. In the long term, the market is a weighing machine.” If you are in the market, then you are always in a bull or a bear phase. Bull markets are inevitable. Bear markets are inevitable. And downturns happen with fair regularity. Use downturn periods to review your resolve and adjust your risk tolerance and asset allocation if necessary. Investing in markets should be viewed as a long term venture. Where you are over the long term is much more important than what happens day to day.