BEAR MARKET INVESTING - from Connolly Report Oct 1998 p.419 with slight revisions

To brush up on bear market trading tactics, I am re-reading Andrew Sarlos' Fear, Greed and the End of the Rainbow (1997, Key Porter Books)…especially pages 16-17, 106-108, 145, 152 and sadly, Mr. Sarlos' last page 182. Here, from page 145, is Andrew Sarlos' rule #2 “You cannot expect to make money in a bear market. The name of the game is to preserve capital, earn a modest return, and have your capital available when the bear market is over.” (I bolded PRESERVE CAPITAL)

“When the real bottom arrives, usually nobody knows it.” Richard Russell September 15 2008

“If you are still in your saving and investing years, a bear market is a gift from the financial gods.”

from 1933 to 1936, U.S. dividends rose by 17% a year - FT John Authers, Feb 20 2009

At the Queen's library here in Kingston, I also found Bear Markets: How to Survive and Make Money in Them by Harry D. Schultz (Prentice Hall, 1966) 322.645. I did not find this book quite as useful.

BEAR MARKET RALLIES: The front page of Connolly Report, December 2003, page 544, (Notice the date…the “greatest sucker rally in history” as Jeremy Grantham called it, had just begun) contained some data from Ned Davis Research about bear market rallies in Japan. The secular bear in Japan, realize started in 1989…about a decade before ours. In the June 16 2003 issue of Barron's Davis said “four rallies of 48%, 34%, 56%, 62% that lasted many, many months. That gives you an average of 50%. And it confirmed what we found in cyclical bulls during secular bears here.”

  • “Don't get trapped in this rally” was the headline over David Chapman's column in the May 8 2009 issue (#8 p.152) in Investor's Digest. I follow Mr Chapman's work because he's one of the few who recognized the 2003-2007 run-up as a sucker rally…a big sucker, in fact. According to David Chapman, there are failed suckers (“unusually short-lived”), mini-suckers (“rallies of 10 to maybe 20 percent”), big suckers (“more than 20 per cent and even as much as 50”), and really big suckers (can last for years). “if we take out 13,300 [on the TSX Composite] we are” into a really big sucker. Mr Chapman's column also had charts and comments on our life insurance stocks: SLF, MFC, GWO (Connolly Report front page June 2009 issue)

Because so few investors have ever met a bear market, a snippet of advice from advisors who were around during the last one in 1973-74 might be in order.

In an interview with Barron's on August 31, 1998, Richard Russell, the editor and publisher of the Dow Market Theory Letter said, “All my signs say we are in a new primary bear market slump. What this means is that the major trend is down and it will continue down for months, even years.” In the Barron's item, Russell outlined the three phases of a bear market. “The first phase, which is where we are now, is the one where we cut all the speculative foam and froth. The second phase, the longest-lasting, is where the market steadily declines due to deteriorating business conditions. The third and final phase is the liquidation frenzy, where blue chips collapse below realistic values and buyers emerge.”

Geraldine Weiss, who used to publish Investment Quality Trends*, a market letter on dividend stocks, and who generously exchanged her excellent twice monthly publication for mine, thinks that because the bear market was long overdue and started from extremely overvalued levels, it will probably be longer and more ferocious than usual. “Just as bull markets do not go straight up,” Geraldine Weiss says in her mid-August issue, “bear markets do not go straight down. Stock prices TREND down–falling, rebounding, and then falling to lowerer lows. Because most investors are optimists, they are inclined to view the rebounds as the start of a new bull market. However, a bear market does not end until all of the preceding excesses are erased from stock prices and the fundament factors of price/earnings ratios, price/dividend ratios and price book value ratios again are attractive.” I have included average yield in my table again. Assuming that all things eventually revert to the norm, we have a long way to go yet for better yields. * Investment Quality Trends 7440 Girard Avenue, Suite #4 La Jolla, Calif.

bear_market_investing.txt · Last modified: 2009/06/18 23:48 by tom
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