Learning to Love Bear Markets: A Lesson in Contrary Thinking

Feb 26, 2019
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Robert Sharp, in his Lore and Legends of Wall Street, says that the investment usage of the terms “bull” and “bear” may date back to the California gold rush of 1848 when miners would entertain themselves with bullfights.

It was probably inevitable that someone would wonder aloud how the bulls would do against the powerful grizzlies that roamed wild in the area. It wasn’t long before they were turning the bulls and the grizzlies loose in the same arena and betting on the outcome.

Sometimes the bull would win by impaling the bear and tossing it up over his shoulder. But more often the grizzly emerged the victor by using its massive strength to wrestle the bull down to the ground, frequently breaking its neck in the process. The bull won by taking its opponent up, but the bear won by taking its opponent down. The terms were soon introduced in San Francisco, where active trading took place in mining shares, to describe opposing investors who fought to establish the direction of the market.

If you’re like most investors, you cheer for the bull. This makes sense if you need to cash out your stock investments in the next 3-5 years. But otherwise, you’ve got it all wrong — you should be pulling for the bear.

Why? Because during the investing phase of your life, you’re going to be a net buyer of stocks for many years to come. You want your monthly investing dollars to stretch as far as possible, acquiring as many stock and stock-fund shares as you possibly can. And that happens when prices are down.

The traditional definition of a bear market has been when the market takes 9-18 months to drop at least 20% in value in the face of widespread investor pessimism. Stock prices that have been battered by a bear market work in your favor, allowing you to stockpile shares to the max. You like it when you can get bargains on clothes, electronics, furnishings, cars, vacations, and houses. Nobody cheers when those things cost more. Similarly, you should also like it when you can get bargains on stocks.

So, learn to love the bear! The truly long-term investor realizes we need more of them. There have been only ten in the past 50 years. Think of them as buying opportunities, albeit brief ones. They frequently last less than a year before prices bottom out (top table).

Fortunately, we have mini-bears (Wall Street calls them “corrections”) more frequently. These, too, should be welcomed for the temporary bargains they offer. In fact, that’s what we may have experienced late last year, although it’s too soon to say for sure. At its low point in December, the market closed -19.8% below its September high. That’s as close as you can get to a bear market while staying in correction territory.

As this month’s editorial (The Indispensable Virtue of Persistence) discusses in greater detail, this selloff may already be over. But there are plenty of reasons to suspect we could see lower prices again before too long. If that is indeed the case, don’t fret and moan along with your friends when the next bear market rolls around. Enjoy the fact that lower stock prices work to your benefit as a long-term investor. Eventually you’ll be the richer for being able to buy at those lower prices!

What to do now

This line of thought may seem confusing, given that we sold stocks at lower prices in December and are buying back at higher prices now (see this month’s new fund write-ups). Granted, that’s not ideal. Unfortunately, that type of “whipsaw” is possible when trying to avoid the brunt of bear-market declines. We still expect to come out ahead, even after this episode, when the impact of the next bear market is eventually included in the analysis.

So keep following the plan! This means following SMI’s Four Levels approach and practicing inside-out thinking. Sacrifice as needed to get free of consumer debt and save for future needs (Level 1). Invest your monthly surplus according to a personalized plan. And while this first foray into Upgrading 2.0’s defensive protocols hasn’t gone as hoped, we encourage you to continue following the strategy’s signals. One significant bear market will make us forget any earlier aggravations the defensive protocols have put us through.

Perhaps just as importantly, knowing your portfolio has a measure of protection against the worst downside risks will help you have confidence to keep buying and owning stocks throughout the rest of the market cycle.

Written by

Austin Pryor

Austin Pryor

Austin Pryor has 40 years of experience advising investors and is the founder of the Sound Mind Investing newsletter and website. He's the author of The Sound Mind Investing Handbook which enjoys the endorsements of respected Christian teachers with more than 100,000 copies sold. Austin lives in Louisville, Kentucky, with his wife Susie. They have three grown sons and many grandchildren.

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