Learning to Love Bear Markets:
A Lesson in Contrary Thinking

Robert Sharp, in his Lore and Legends of Wall Street, says that the investment usage of the terms "bull" and "bear" 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 need to start 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 40 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 be experiencing right now, but it's too soon to say for sure. At its lowest point to date, the drop has been only 9.4% from the July high. The selloff may already be over and the bull market about ready to resume (drat), or perhaps the market will yet fall -10% to -19% into that mini-bear territory and present a fine window of opportunity for buyers (yes!).

If it's the latter, don't fret and moan along with your friends (who thus reveal their short-term way of thinking despite protestations to the contrary). Enjoy the fact that bargains will continue to be available in the coming months. Eventually you'll be the richer for it!

WHAT TO DO NOW

Continue what you've been doing, which hopefully involves following our Four Levels strategy and practicing inside-out thinking. Sacrifice as needed to get free of consumer debt (Level 1) and save for future needs (Level 2).

Invest your monthly surplus according to a personalized plan. If your plan calls for dollar-cost-averaging, keep it up regardless of market conditions. If possible, invest even more than usual during bear markets.

If you have a lump sum to invest and a time frame of at least five years, you may want to divide it into 3-4 "pieces" and dollar-cost-average into the market over the coming months.

• Make Sure Your Investment Decision-Making Is Inside-Out
• Creating Your Own Personal Financial Plan
• How to Implement and Monitor a Dollar-Cost-Averaging Strategy
• Beating the Bear Market Blues 
• SMI Investing Principles page

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