Benjamin Graham - advantages of a long bear market

"The true investor would be pleased, rather than discouraged, at the prospect of investing his new savings on very satisfactory terms." 

Investors would be "enviably fortunate" to benefit from the "advantages" of a long bear market.

Benjamin Graham's advice to guide investors in a falling market

If You Think Worst Is Over, Take Benjamin Graham's Advice
By JASON ZWEIG

May 26, 2009

It is sometimes said that to be an intelligent investor, you must be unemotional. That isn't true; instead, you should be inversely emotional.

Even after recent turbulence, the Dow Jones Industrial Average is up roughly 30% since its low in March. It is natural for you to feel happy or relieved about that. But Benjamin Graham believed, instead, that you should train yourself to feel worried about such events.

At this moment, consulting Mr. Graham's wisdom is especially fitting. Sixty years ago, on May 25, 1949, the founder of financial analysis published his book, "The Intelligent Investor," in whose honor this column is named. And today the market seems to be in just the kind of mood that would have worried Mr. Graham: a jittery optimism, an insecure and almost desperate need to believe that the worst is over.

You can't turn off your feelings, of course. But you can, and should, turn them inside out.

Stocks have suddenly become more expensive to accumulate. Since March, according to data from Robert Shiller of Yale, the price/earnings ratio of the S&P 500 index has jumped from 13.1 to 15.5. That's the sharpest, fastest rise in almost a quarter-century. (As Graham suggested, Prof. Shiller uses a 10-year average P/E ratio, adjusted for inflation.)

Over the course of 10 weeks, stocks have moved from the edge of the bargain bin to the full-price rack. So, unless you are retired and living off your investments, you shouldn't be celebrating, you should be worrying.

Mr. Graham worked diligently to resist being swept up in the mood swings of "Mr. Market" -- his metaphor for the collective mind of investors, euphoric when stocks go up and miserable when they go down.

In an autobiographical sketch, Mr. Graham wrote that he "embraced stoicism as a gospel sent to him from heaven." Among the main components of his "internal equipment," he also said, were a "certain aloofness" and "unruffled serenity."

Mr. Graham's last wife described him as "humane, but not human." I asked his son, Benjamin Graham Jr., what that meant. "His mind was elsewhere, and he did have a little difficulty in relating to others," "Buz" Graham said of his father. "He was always internally multitasking. Maybe people who go into investing are especially well-suited for it if they have that distance or detachment."

Mr. Graham's immersion in literature, mathematics and philosophy, he once remarked, helped him view the markets "from the standpoint of eternity, rather than day-to-day."

Perhaps as a result, he almost invariably read the enthusiasm of others as a yellow caution light, and he took their misery as a sign of hope.

His knack for inverting emotions helped him see when markets had run to extremes. In late 1945, as the market was rising 36%, he warned investors to cut back on stocks; the next year, the market fell 8%. As stocks took off in 1958-59, Mr. Graham was again pessimistic; years of jagged returns followed. In late 1971, he counseled caution, just before the worst bear market in decades hit.

In the depths of that crash, near the end of 1974, Mr. Graham gave a speech in which he correctly forecast a period of "many years" in which "stock prices may languish."

Then he startled his listeners by pointing out this was good news, not bad: "The true investor would be pleased, rather than discouraged, at the prospect of investing his new savings on very satisfactory terms." Mr. Graham added a more startling note: Investors would be "enviably fortunate" to benefit from the "advantages" of a long bear market.

Today, it has become trendy to declare that "buy and hold is dead." Some critics regard dollar-cost averaging, or automatically investing a fixed amount every month, as foolish.

Asked if dollar-cost averaging could ensure long-term success, Mr. Graham wrote in 1962: "Such a policy will pay off ultimately, regardless of when it is begun, provided that it is adhered to conscientiously and courageously under all intervening conditions."

For that to be true, however, the dollar-cost averaging investor must "be a different sort of person from the rest of us ... not subject to the alternations of exhilaration and deep gloom that have accompanied the gyrations of the stock market for generations past."

"This," Mr. Graham concluded, "I greatly doubt."

He didn't mean that no one can resist being swept up in the gyrating emotions of the crowd. He meant that few people can. To be an intelligent investor, you must cultivate what Mr. Graham called "firmness of character" -- the ability to keep your own emotional counsel.

Above all, that means resisting the contagion of Mr. Market's enthusiasm when stocks are suddenly no longer cheap.



http://online.wsj.com/news/articles/SB124302634866648217?mg=reno64-wsj&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB124302634866648217.html

3 Reasons To Buy Into The Market Today

29 June 2012

This market is a buy. Here's why.

The stock market, it's fair to say, is in an uncertain mood. And, as in the early days of 2009, just before the market's nadir, daily items of news are having a disproportionate effect on sentiment.

The economy, Greece, banking downgrades, American purchasing and housing surveys -- you name it, and stock prices are reacting, oscillating wildly on euphoria and gloom.

At such times, it's tempting to sit it out, and wait for calmer times before putting more money into market. But that, I think, would be a mistake.

Here's why.

Pessimism abounds

Let's start with why the market is reacting to newsflow, and not shrugging it off. Simply put, investors today are far more pessimistic than they were earlier in the year, when the FTSE 100 (UKX) was within a few points of 6,000.

And pessimistic markets, in short, are buying opportunities. As Benjamin Graham put it: "Buy when most people -- including experts -- are pessimistic, and sell when they are actively optimistic." Or, to cite that other well-known super-investor, Warren Buffett: "Be fearful when others are greedy, and be greedy when others are fearful."

Can the market get more pessimistic still? Undoubtedly. Can people get even more fearful? Of course. But with the market down 10-15%, you can buy today the same shares that you were buying just weeks ago -- but significantly more cheaply.

And as Warren Buffett -- again! -- so memorably put it in a thoughtful article in Fortune magazine a few years back:

"When hamburgers go down in price, we sing the Hallelujah Chorus in the Buffett household. When hamburgers go up, we weep. For most people, it's the same way with everything in life they will be buying ‑‑ except stocks. When stocks go down and you can get more for your money, people don't like them any more."

And unquestionably, the stock market's hamburgers have just gone down in price. AstraZeneca (LSE: AZN), Aviva (LSE: AV), BT (LSE: BT-A), BAE Systems (LSE: BA), Barclays (LSE: BARC) andLloyds Banking Group (LSE: LLOY) -- undeniably, Britain's blue chips have gone on sale.

That said, only some of those particular blue chips are rated as a 'buy' by Neil Woodford, the subject of a recent special free Motley Fool report: "8 Shares Held By Britain's Super Investor". And others in that short list above, it's fair to say, he wouldn't touch at all.

Which are which? Why not download the report, and find out? As I say, it's free.

Asset class perspective

That said, it's possible to view today's market in a very different light. Namely, this way: if you don't like shares at today's prices, what do you like?

Cash? Real returns are either negative or zero -- and the next move in interest rates is likely to be downwards. Property? You're braver than I am. Gilts? Every bubble has to burst one day -- and we're surely in a gilt bubble. And so on.

On the other hand, decent blue chips are on yields of 5% or so, delivering dividend growth of 5-10%, and offer capital growth into the bargain.

And, what's more, at very reasonable prices. The FTSE 100's price-to-earnings (P/E) ratio yesterday was 9.88, compared to 10 years ago when it was 19.88 -- and that, in short, is one helluva difference in valuation.

Watch-list wonders

Frankly, there's not much point in having a watch list if all you do is, well, watch it.

Or, to put it another way: "When shares on my watch list scream 'bargain', I buy them. What do youdo, Sir?," as master investor and economist John Maynard Keynes so memorably didn't quite say.

And with those sentiments in mind, there's one share in particular that I've been loading up on in recent times, having almost doubled my holding this year. What's more, I'll be buying still more of it in mid-July, when I've banked my dividends from Sainsbury (LSE: SBRY), Marks & Spencer (LSE: MKS),GlaxoSmithKline (LSE: GSK) and BP (LSE: BP), and found some more spare cash.

Its name? You can find that out in another free special report from the Motley Fool -- "The One UK Share Warren Buffett Loves". But from the way that Buffett has seemingly been topping up himself in recent times, it's clear that the share is on his watch list, too. The report is free, so why not download a copy now?

Your view?

Of course, not everyone will agree with me. Some of you, as you've explained before, in comments appended to articles like this, are rather keener on property than I am.

But with the FTSE 100 on a P/E below 10, real interest rates largely negative and a wobbly housing market, that's the world as I see it. Comments?


http://www.fool.co.uk/news/investing/2012/06/29/3-reasons-to-buy-into-the-market-today.aspx

The time to BUY is actually when shares have been beaten down by the market.

Why the panicking crowd has got it wrong
– again – and how you can profit

Let's face it, even the most optimistic analyst would say that the volatile conditions of 2011 are likely to continue over the next year or two.

Whatever our politicians might hope for, the eurozone's problems of high national debts and a tepid economic recovery aren't going to go away any time soon.

So, what's an investor to do?

Sadly, history already tells us what many investors are doing: cutting and running, deciding that the stock market isn't for them, and taking their losses on the chin.

Research shows that time and time again, private investors pile into equities at too high a price...when shares have already shot up way too far... And they get out at a price that's too low... often just before they start to recover again.

If that's not wealth-destroying, then I don't know what is.

For example, UK investment author Tim Hale has pointed out that in 1984-2002 – a bull market when the equity markets turned $100 of spending power into $500 – private investors turned that same $100 into just $90⁸.

A 2007 study of UK investors over the period 1992-2003 found that the returns of private investors were around two percentage points a year lower than the funds that they were invested in...⁹

These feeble returns are all thanks to the fuzzy thinking of a crowd that follows their emotions, rather than using clear-headed analysis.

They wrongly believe that you buy shares when they're going up and you get out of the market when they're hitting rock bottom.

Here's why this is wrong – in fact, the time to BUY is actually when shares have been beaten down by the market.

That is, of course – if you know what to look for...

https://www.fool.co.uk/shop/secure/order-01.aspx?dc=ccd70129-62cb-417b-a440-99de3c029d1a&sf=0512_hb_plndr_L1&pd=07&source=u74spoeml0000189

Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.

If I can’t convince you that a market downturn is no reason to panic, maybe the world’s greatest investor can. In his 1997 letter to Berkshire Hathaway shareholders, Warren Buffett wrote:

A short quiz: If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves.

But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the “hamburgers” they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.
The next time the stock market takes a tumble, remember Buffett’s advice. And then go out and buy yourself some hamburgers!

What to Do in a Down (Bear) Market?

The stock market often falls under the conditions of the so called bull and bear markets.  Intelligent investors are well familiar with the conditions of both and know exactly what to do. 

Under a down market you have several options.

- One of them is to sell immediately in order to minimize your losses.

- Another option is to let the market work its way through the problem with no action from your side.

- A third option is to benefit from the stock decline and add some more to your portfolio. But, this should be done only if you don't perceive that there is something wrong with the company that has led to the stock decline.


Final Piece of Advice

Never forget that it is important to base your decisions on knowledge not on feelings. This means that being educated about the company and the industry from which your stocks come from, the market conditions under which you operate will be of small importance to you.

3 Stages of a Bull Market and 3 Stages of a Bear Market

2011 Value Investing Congress Notes
http://www.scribd.com/doc/54958483/2011-Value-Investing-Congress-Notes

The swing of the pendulum 
o Constantly going between greed and fear, risk tolerance and risk aversion, and optimism and pessimism
o In theory, the pendulum should be at the happy medium

 On average it is in the middle 
 But it spends little time there
 Excesses constitute the errors of herd behavior

 3 stages of a bull market 
 Few people feel things are getting better
 Most people realize improvement is taking place
 Everyone thinks things will get better forever
 "What the wise man does in the beginning, the fool does in the end."
o The last buyer pays the price 

 3 stages of a bear market 
 Few people realize that things are overpriced and dangerous
 Most people see the decline is underway
 Everyone believes that things will get worse forever
o Great opportunity to buy if we can behave counter-cyclically - Importance of being a contrarian.



Ben Claremon: The Inoculated Investor http://inoculatedinvestor.blogspot.com/  

How to Shortsell, Trade Example

Let's take a look at a trade made during this "TOUGH" market!

The Stock Market is Falling, How I trade Down Markets.

Trade with the trend.

Keep these 113 words of Graham close at hand and let them guide you throughout your investing life.

The true investor scarcely ever is forced to sell his shares, and at  all other times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more.* Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons’ mistakes of judgment.†

* “Only to the extent that it suits his book” means “only to the extent that the price is favorable enough to justify selling the stock.” In traditional brokerage lingo, the “book” is an investor’s ledger of holdings and trades.

† This may well be the single most important paragraph in Graham’s entire book. In these 113 words Graham sums up his lifetime of experience. You cannot read these words too often; they are like Kryptonite for bear markets.  If you keep them close at hand and let them guide you throughout your investing life, you will survive whatever the markets throw at you.

Buying Time

When the market hits its low, true value investors feel that harvest time has arrived.

"The most beneficial time to be a value investor is when the market is falling," says institutional manager Seth Klarman.  There are plenty of companies ripe for the picking.

In the summer of 1973, when the stock market had plunged 20 percent in value in less than 2 months, Warren Buffett told a friend, "You know, some days I get up and I want to tap dance."

Unfortunately, this is the time when investors are feeling most beat up by the markets.  Fear and negative thinking prevail, and anyone who has faced down a bear knows how paralyzing fear can be.  This, at the depths of a bear market, is the time to buy as many stocks as are affordable.

Value bargains aren't found in strong market.  A good rule is to examine stock markets that have reacted adversely for a year or so.

Undervalued stocks quite often lie dormant for months - many months - on end.  The only way to anticipate and catch the surge is to identify the undervalued situation, then take a position, and wait.

Benjamin Graham: "Buying a neglected and therefore undervalued issue for profit generally proves a protracted and patience-trying experience."

Warren Buffett on investing in a climate of fear

Warren Buffett on investing in a climate of fear 

– a Q1 letter to send clients

April 12, 2010

"I have no idea what the stock market will do next month or six months from now. I do know that, over a period of time, the American economy will do very well and investors who own a piece of it will do well."

Warren Buffet in an interview on CNBC on Friday, October 10, 2008

After the market roller coaster of 2008 and 2009, the first quarter of 2010 has been blessedly uneventful by comparison. The US markets gained about 5% in the first quarter, the best start to the year since 1998 - the US market ended up about 60% from its lows of a year ago. Canada did well also, up almost  3% in the first quarter.

That said, there is still a cloud of uncertainty that is making many investors nervous.

Causes for concern ... and for optimism

Even with the stabilization of the global economy, there's no shortage of short term causes of concern:

... continued questions on the direction and timing of the economic recovery in the United States and Europe and the timing of higher interest rates

... US housing prices that are staying stubbornly low and unemployment levels in North America and Europe that are stubbornly high.

... and in late March the deputy director of the International Monetary Fund made headlines as he talked about the need for advanced economies to cut spending in order to reduce deficits. 

Here's a New York Times article about the IMF's views: http://www.nytimes.com/2010/03/22/business/global/22imf.html?scp=1&sq=lipsky%20imf&st=cse

The good news is that there are offsetting positives, even if the media headlines that feature them aren't quite as prominent:

... on Monday March 22, the Wall Street Journal ran a story about dividend hikes as a result of rising profits by US companies. The article also mentioned that cash on hand on US corporate balance sheets was at the highest level since 2007.

... on the same day the Financial Times ran a similar story about dividend increases in Europe

... and there's growing attention to the impact that Germany's emphasis on manufacturing productivity had in sheltering it from the worst of the economic downturn - and questions about whether  this might be a model for other countries. In March the Economist ran a 14 page feature on how Germany positioned itself for success.

Forecasting the future

Whether you choose to focus on the positives or the negatives, there's broad agreement that the steps taken by governments stabilized the financial crisis that we were facing a year ago - and there is almost no talk today of a global depression.

So the issue is not whether the economy will recover, but when and at what rate -and whether there might be another stumble along the way.

If you look for investing advice in the newspaper or on television, the discussion tends to revolve around what stocks will do well in the immediate period ahead ... this week, this month, this quarter.

We refuse to participate in that speculation - when it comes to short-term predictions, whether about the economy or the stock market, there's one thing we can say with virtual certainty: Most of them will be wrong.  Quite simply, no one has a consistent track record of successfully forecasting short term movements in the economy and markets.

Which is why in uncertain times such as today, one of the people I look to for guidance is Warren Buffett.

Advice from Warren Buffett

In an investment industry poll a couple of years ago, Warren Buffett was voted the greatest investor of all time; among the runners up were Peter Lynch, John Templeton and George Soros.

Buffett's returns are a testimony to the power of compounding.  From 1965 to the end of 2009, the growth in book value of his investments averaged 20% annually. As a result, $10,000 invested in 1965 would currently be worth a remarkable $40 million. By contrast, that same $10,000 invested in the US stock market as a whole, returning just over 9% during this period, would be worth $540,000.

In one of his annual letters to shareholders, Warren Buffett wrote that it only takes two things to invest successfully - having a sound plan and sticking to it. He went on to say that of these two, it's the "sticking to it" part that investors struggle with the most. The quote at the top of the letter, made at the height of the financial crisis, speaks to Buffett's discipline on this issue.

I try to apply that approach as well - putting a plan in place for each client that will meet their long term needs and modifying it as circumstances warrant, without walking away from the plan itself.

Boom times such as we saw in the late 90's and scary conditions such as we've seen in the past two years can make that difficult - but those conditions can also represent opportunity. Indeed, in his most recent letter to shareholders Buffett wrote that "a climate of fear is an investor's best friend."

Five core principles that shape our approach

On balance, I share Warren Buffett's mid term positive outlook, not least because many of the positives that drove market optimism two years ago are still in place, among these the continued emergence of a global middle class in developing countries like Brazil, China, India and Turkey. This educated middle class will fuel global growth that will make us all better off.

In the meantime, here are five fundamental principles that we look for in money managers and that  drive the portfolios that we believe will serve clients well in the period ahead.

1.     Concentrate on quality                                          

 The record bounce in stock prices over the past year was led by companies with the weakest credit ratings. Some have referred to last year as a "junk rally", with the lowest quality companies doing the best.  That's unlikely to continue- that's why I'm focusing my portfolios on only the highest quality companies, those best able to withstand the inevitable ups and downs in the economy.

2.     Look to dividends

Historically, dividends made up 40% of the total returns of investing in stocks and have also helped provide stability through market turbulence. Two years ago, quality companies paying good dividends were hard to find - one piece of good news is that today it's possible to build a portfolio of good quality companies paying dividends of 3% and above.

3.     Focus on valuations

Having a strong price discipline on buying and selling stocks is paramount to success - history shows that the key to a successful investment is ensuring that the purchase price is a fair one. Investors who bought market leaders Cisco Systems, Intel and Microsoft ten years ago are still down down 40% to 70%, not because these aren't great companies but because the price paid was too high.

4.     Build in a buffer

 Given that we have to expect continued volatility, we identify cash flow needs for the next three years for every client and ensure these are set aside in safe investments. That buffer protects clients from short term volatility and reduces stress along the way.

5.     Stick to your plan

In the face of economic and market uncertainty, another  key to success is having a diversified plan appropriate to your risk tolerance - and then sticking to it. It can be hard to ignore the short-term distractions, but ultimately that's the only way to achieve your long term goals with a manageable amount of stress along the way.

In closing, let me express my thanks for the continued opportunity to work together.  Should you ever have any questions or if there's anything you'd like to talk about, my team and I are always pleased to take your call.

Name of advisor

P.S. If you're interested, here's a link to Warren Buffett's 2010 letter to investors:                       http://www.berkshirehathaway.com/letters/2009ltr.pdf

http://clientinsights.ca/article/warren-buffett-on-investing-in-a-climate-of-fear-a-q1-letter-to-send-clients

A Q1 letter to send clients - Warren Buffett on investing in a climate of fear 

An important note:

Over the past 18 months, the quarterly templates for a client letter have ranked among the most popular features on this site.

Research with investors has identified the five elements of an effective client letter. It has to be:

1.     balanced in outlook

2.      candid

3.     short enough for clients to get through comfortably but long enough to be substantial

4.      supported by facts

5.     indicative of the advisors voice and personality

On this last point, if you like the basic structure of the letter, you MUST take the time to customize it to your own philosophy and outlook - I can't emphasize this strongly enough.