What are you -- a bull, bear, chicken or owl?

http://www.thejakartapost.com/news/2007/09/23/what-are-you-bull-bear-chicken-or-owl.html-0



What are you -- a bull, bear, chicken or owl?
The Jakarta Post , Jakarta Sun, 09/23/2007

Financial markets of late have been volatile, to say the least.

After soaring to record highs in June, the U.S. and most other stock markets then fell by up to 10 percent before making a partial recovery. Each day brings surprises with ups and downs reflecting the good or bad news of the day.

Stock markets have also been spooked by the crisis in the lower end of the housing market in the U.S. and the resulting collapse of a number of related hedge funds.

Even a rock-solid UK building society has come under pressure as panicking investors withdraw their savings. The price of oil has hit record highs and gold has gone over the US$700 an ounce mark. (Remember my earlier advice to have holdings in energy and precious metals?)

Are the 'bears' winning?

With housing worries and unemployment growing in the U.S., with consumer confidence and the dollar falling (note that the rupiah has been falling with the dollar), fear of a recession is on everyone's mind. A recession in the U.S. would invariably impact the global economy. In such a scenario the bears will certainly have it.

In case any reader is not familiar with the term, a ""bear"" market technically signifies one that has fallen at least 20 percent, the allusion to the bear being that a bear is ""clawing it down'.

Have the 'bulls' conceded defeat?

Again, for readers unfamiliar with the terminology, a ""bull"" market is one that is rising, the analogy this time being one of a bull ""tossing it upward"".

All is far from being gloom and doom except for those directly affected by the narrow band of assets that have collapsed in value. Most economies are still strong and expanding.

Unemployment is still close to historical lows in many countries and the twin powerhouses of India and China continue to steam ahead supporting commodity-based economies such as Australia.

A lower dollar can also be positive for the U.S. as it will discourage imports and stimulate exports. Another factor that is encouraging for stock markets is that valuations are not particularly expensive.

Many P/E (price-to-earnings ratios) are around 16/1, which means shares are paying dividends of over 5 percent. This compares favorably with bonds and money markets, particularly since stocks have the potential for capital growth over time.

During the height of the technology boom some shares were trading at P/E levels of 300/1 which meant a return of only one-third of 1 percent per annum or, putting it another way, it would take an investor 300 years to get his money back if he relied on the dividend alone.

Of course, people were relying on capital growth but at those P/E levels their hopes were doomed. We do not have that scenario today.

So, overall, a ""crash"" on the scale of 1987 or the bursting of the technology bubble in 2000 seems unlikely, although if the property market or unemployment worsen in coming months the bears could have their way. If markets can limit their fall from previous highs to less than 20 percent, then what is happening now can be written off as a ""correction"".

What does history tell us?

Since 1946 there have been 10 official ""bear"" markets (falls of at least 20 percent) based on the S&P 500 index. During the same period there have been 16 ""corrections"" (falls of at least 10 percent). Anyone who invests in the stock markets should keep this in mind.

How long can it take for markets to recover? Historically, (since 1946) it has taken 669 days on average to recover from a full bear market and 111 days to recover from a correction. Hence the reason for repeated advice to the unwary that investing in the stock markets is not for the short term.

The bulls are unquestionable winners over the long term as stocks invariably rise over time. Their rise is not a constant one, however, and is regularly interrupted by corrections and bear markets.

These are a necessary part of the process; without them, the markets would be driven to unrealistic heights which, in turn, could lead to a serious collapse of the system. A bit like geological faults; when pressure from the earth's crust builds up, it is preferable to have it relieved gradually by minor earthquakes rather than delay until the advent of a major one.

How to win in a bear market

The secret is simply to invest when others are selling. To do this requires resisting our instinct (built into our genes over thousands of years) to follow the herd.

Regular savers also win in a bear market because they continue to buy shares or units when prices have fallen. Provided they keep doing this they will benefit when the next bull market comes along.

Patience and perseverance is the key, since the recovery could take several years, but rest assured, a bull market will follow a bear market as sure as night follows day.

Investing in a hedge fund that ""goes short"" is also a way to make money in falling markets. In this case the fund manager does not invest directly in stocks but actually borrows and sells them.

He then repurchases and returns them at a later date. If he has judged correctly and the repurchase price is lower than what he paid then the difference, less expenses, is pure profit.

Such a fund can be a useful component in a portfolio to soften the impact of a falling market, but much depends on the skill of the manager. It is not something you should try at home!

Where do the chickens come in?

Bulls and bears are part of standard financial terminology. Chickens and owls are not, but I thought I would throw them in to add a bit of color.

Chickens, I would say, are those who panic out of an investment when faced with the grunts of the bear. This is quite a natural reaction. Chickens can live quite comfortably with vegetarian bulls but would not fare well in the proximity of a bear.

In fact, a chicken could come out quite well if it flies out at the top of a bull market. But, in practice, it tends not to react until the market has fallen a long way, then it finally panics.

But it's too late; it has already fallen victim to the bear and is no longer around when the bull comes back onto the scene to save it.

Another group of chickens will not even venture into the fray. They remain with cash under the mattress or in a bank account year after year watching the purchasing power whittle away while others are making their fortunes.

But if they are of a nervous disposition this is probably their best strategy as they would probably come off worse among the bulls and bears.

And finally the owls ...

What does the wise old owl do? It sits quietly on a high branch watching the world go by until a suitable victim is in sight. It then swoops and grabs its prey.

The financial analogy is an investor who quietly and unemotionally watches the markets go up and down and then seizes the opportunity when he spots a bargain. I would place Warren Buffett, the world's most successful stock market investor, in this category.

So who will win?

History and logic tell us the bulls will be the long-term winners. The stock markets represent real assets and global wealth.

Bear markets will still have their day every few years. They can inflict a lot of pain but if we see how they fit into the big picture we can live with them and even profit from them.

While ""bulls"" and ""bears"" are terms describing the markets they can also relate to investors who can be described as ""bullish"" or ""bearish"".

What should we strive to be? Clearly, unless we are bullish we will never get anywhere, but there are times when we may need to be bearish.

There may even be times when it can pay to be a ""chicken"" but it is not easy to judge the timing. It can also pay to be a ""wise old owl""; just stay calm and alert.

You may spot a great opportunity!

Colin Bloodworth is a senior financial adviser with Financial Partners International.