In case you’ve missed it, we have recently found ourselves in a bear market environment. The first quote I want to share with you about this market environment is,
“Bull markets are great, but they breed complacency. Bear markets can be energizing. Instead of fretting over the decline in your net worth think opportunistically about all of those bargains and the potential gains when inevitably a bull market returns.” – James B. Stewart
This was published in the Wall Street Journal in 2008 as the market was selling off and going into a bear market territory.
It’s funny, during bull market phases we have quotes like:
“Don’t confuse brains will the bull market.”
and
“Everyone’s a genius in a bull market.”
Things feel fantastic when the market is going up and a lot of times we attribute our investment success to skill and as great investors, we should be able to create these great returns. When the market goes down we start blaming less our own skill and instead, blaming bad luck (i.e. the market is moving against us, this is just how things are going, etc.).
As an investor, I have always found that I have grown way more during bear market phases than bull market phases. It is very easy to become complacent when the market is going up and everything is working. When the market goes down, it becomes a great opportunity to reevaluate your process, decide what has or has not been working, and think about how you can prepare yourself for the next bear market phase.
I have been through a couple of these phases now since my initial introduction in the mid-2000s. My initial introduction to investing was during the 2001-2002 bear market, which included 9/11 (and other similar crazy times living in the New York area), then again the 2007-2009 bear market phase, and smaller phases such as 2015 and others which were gentle but frustrating bear market phases.
I will tell you that the complacency that manifests itself during bull markets evaporates very quickly when things begin to go down and begin people to see red in their portfolio.
My second quote by Peter Lynch will hopefully give you some inspiration to consider,
“People who succeed in the stock market also accept periodic losses, setbacks and unexpected occurrences. Calamitous drops do not scare them out of the game.”
Over the years I’ve spent a lot of time working with institutional investors and the one big difference I have seen between institutional investors, money managers managing large portfolios, and individuals managing their own money, is risk aversion, or a way of handling losses. Professional money managers know that losses are part of the game. They know that bear markets happen and in a situation like this when the market is down 20%+ they view it as an opportunity to buy good companies at a bargain. They look for new opportunities, consider where they can sell their losers, and find new ways to ride the leg, being fairly certain that this bear market phase will be followed by a bull market phase (as it has happened every time in history).
I found that when the market goes down your phone will ring significantly more because your clients will want to know what to do. When the market is going up, they worry less because they don’t feel they need your help, but when the market is going down they do find they need your help.
It is important to remind people to remember that losses are part of investing, just like gains are. If you look at the long-term trend in stocks (depending on where you start) the equity markets have provided a consistent 6-10% annualized return (again, depending on the window you look at). There are periods where it has lost a great amount of money, but the reality is it is always mean reverted back to that long-term uptrend and, if history is our guide, we can expect that at some point that will return. The good news is I found bear markets are a great opportunity to learn as long as you can stomach the capital loss and use it as an opportunity to reinvent yourself and your process.
RR#6,
Dave
Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. Please see the Disclaimer page for full details.