Bubble Trouble

Bubbles and bear markets are two separate and distinct things. Investors truly need to understand the differences. You need to understand which strategy to apply when, and not use a hammer when you need a screwdriver. Once you see the straightforward differences, you will know what to do.

One buys in a bear market and sells in a bubble. Those buying in bad markets made a lot of money. This approach avoids the pitfalls of market timing and uses knowledge of what you own or want to own to a maximum advantage.

A bubble results from a mania, meaning that either valuations or fundamentals are highly suspect or totally wrong, since emotions and perceptions have overwhelmed what is "real". It is better to run - meaning sell - if you recognize a bubble.

Some people wonder why the NASDAQ remained 3,000 points below its old year 2000 high for more than 5 years. They wonder why they had trouble making back their money that was lost in the year 2000 bubble. That is because they think of bubbles like bear markets and do not realize the incredible excesses of bubbles that have to be worked off. But the most important difference is the cause.

Bear markets are caused mainly by fundamental problems. The 5 main cause of a bear market are listed (see reference). It runs its course, and so does the poor market. Then things normalize. You buy into a bear market, since you get great prices on stocks; then stocks come back and you make more money.

Bubbles are not caused by fundamental events. It is investors themselves who create them. Investors come to believe some things that are not true or not rational and thus create a mania in a stock, in an industry, or in the overall market. If the mania goes on for a time, a bubble is created, and that builds until its inherent instability leads it to break.

One of the interesting differences between bubbles and bear markets is that in a bear market, there are plenty of bulls and bears. In a bubble, the few bears are drowned out by the loud and almost universal bullishness. This happened with the Internet, because a mania is normally caused by a belief in something that is supposed to be new and amazing, even though this cannot be proved.

It is natural to like momentum and money, but if investors have no disciplines and no sense of bubbles, then they are headed not for the big money, but for quite the opposite.

With bear markets, one wants to use buy and sell disciplines and buy when prices and fundamentals would dictate that.

There are market bubbles once in a great while, perhaps once in a life-time, but individual stock bubbles are more common. All bubbles have some similarities that concern how perceptions, emotions, and a lack of accurate information combine to set an investor trap.

The five possible factors that cause bear markets

While various people can legitimately pick factors that trigger bear markets, or those stock-market environments that result in declines that are long, very significant, or both, there are five factors which great investors center on. These elements of a bear market can be present individually to create falling prices, or they can appear in combination.

The five possible factors that cause bear markets are:

1. Persistent overvaluation.
2. High or rising interest rates or rising inflation that leads to them.
3. Weakness in company earnings. (By the time people know they are in a recession, normally weak earnings have been evident and if high interest rates cause economic weakness, then those rates have been present for a time.)
4. Oil shocks.
5. Wars (but not always).

The first three are, "the big three"; and those who ignored them suffered much greater losses than those who did not.

In each of the following instances: the terrible 1973-1974 market, the 1983 tech boom and bust, the 1987 stock-market crash and the 2000 Internet and technology bubble burst, there was a general disregard for valuations of individual stocks leading up to the collapses. Each collapse was related to this factor. They did not descend upon the markets out of nowhere.

Markets have a habit of discounting good and bad events in advance. This explains why a company's stock may make a big move before its earnings are made public, or why the market may hit the doldrums for three weeks prior to a rise in interest rates. The reason is anticipation. Savvy investors must take into account that reaction to future events may already be reflected in current prices.

Countless lessons learned from this severe downturn

A Bear Market to Remember

How it's sparking richer fund analysis.


By Karen Dolan, CFA 04-16-09 06:00 AM


Stock and bond markets around the world have perked up lately, but the gloom of the past 18 months still hangs like a low dark cloud. In the years to come, we investors will surely be working to rebuild the nest eggs we've seen fractured--certainly battered, but hopefully we'll emerge a bit wiser.


Individually and as a group, our mutual fund analysts have spent a lot of time reflecting about what has happened over the past 18 months. We didn't predict how deep and severe this current crisis would become, but we're okay with that. We've never attempted to be macroeconomists or market strategists who can tell you where the Dow is headed. Our goal is to guide investors to the industry's best funds, not by focusing solely on what happened in the past, but by understanding how a fund's manager, strategy, fees, portfolio, and stewardship come together to form an investment case. We think we've done a good job achieving our goal over the long haul, but there have been cases along the way where we failed to spot the risk or challenge our own assumptions, as well as those of our readers', about investing in funds.

We've taken countless lessons away from this downturn already and we're still in the middle of learning more. The following four points don't represent a complete list of everything we've learned, but these are among the most noteworthy.

1. Value funds can lose more than you think.
Many, including us, have made the case for value-based investment strategies. Funds scrounging around the markets' bargain bin should offer better downside protection, because ignored and down-and-out stocks trading at discounts should be less susceptible to further declines. Numerous academic studies support the resiliency of value-based strategies, and some of the money managers with the best long-term records are practitioners of some flavor of value investing.

While the losses we've seen in the past 18 months have been deep, they are not the first for value funds. They got clocked by financials in 1990. The average large- and small-cap value fund lost by 6% and 14%, respectively, that year. And, although value funds looked like rock stars versus their punished growth rivals in the 2000-02 bear market, they still posted double-digit losses on average in 2002.

Any illusion of sturdiness for value funds was extinguished in this bear market, however. Value funds have posted steep losses, exceeding the slide experienced by their growth counterparts, the S&P 500 Index and value funds' own history.

I could go on for pages explaining why so many value strategies failed to preserve capital in this tough environment, but two key issues stand out. Most value funds focused too heavily on individual stocks without fully considering the bigger macroeconomic picture, and too many portfolio managers were caught holding companies with balance sheets they apparently didn't fully understand.

At the heart of the problem were the hefty financials-industry stakes in the value equity indexes and common to value funds. (Financial companies represented more than 30% of the Russell Value indexes at the market peak in October 2007.) Financials had been booming for years, so even though the stocks looked reasonably priced on common valuation metrics such as price/earnings and price/book ratios, they were indeed priced for perfection.

We gave a lot of credit (too much, in fact) to managers who were otherwise supposed to be research hounds and financial statement wizards, but who failed to recognize the embedded risks in their bank stock holdings--both in terms of overall leverage risk and asset quality. We're now spending more time finding new ways to stay on top of vulnerabilities that may be lurking in the portfolio and we're bringing an overall more skeptical mindset to our analysis of value strategies.

2. Expenses tell much of the story for bond funds, but not all of it.
Fractions of a percent have typically separated the bond-fund leaders' performance from the laggards'. Given the tight range of returns, we know that small differences in what a fund charges have proven to make a big difference in the end result for investors over the long haul.

In some cases, though, the analysis took that idea too far: cheap fund good, expensive fund bad. Our research has always been much more robust than that, but admittedly, we had a hard time seeing just how different the portfolios of fixed-income funds really were--in part because detailed bond portfolio data can be tough to come by. Until last year, an analysis of returns, interest-rate sensitivity, and sector compositions made bond funds look like they were more in line with each other than was really the case. Moreover, some bond managers really played down the risks of their strategies, often because they viewed them through the lens of some risk-management tool (which I'll tackle in greater detail in the next section).

The risks were there, though, and just waiting to blow some funds to shreds and severely hurt others. My colleague Eric Jacobson recently authored an illuminating article discussing these risks in greater details and highlighting some of the worst offenders.

The focus on expenses isn't wrong. Costs remain one of the most predictive nuggets of data we've studied. And, although expense ratios themselves didn't make or break a bond fund in 2008, there was a correlation between expenses and other behaviors that did make or break funds. The numbers confirm it. When you remove the effect of different expense ratios and look at 2008 gross returns, bond funds in the cheapest quartile ranked in the 47th percentile of their peer group while the most expensive quartile ranked in the 55th percentile. In other words, the cheapest funds got themselves into less trouble last year. This isn't a new finding. Morningstar's Don Phillips wrote a research piece about this phenomenon in 1995 called "A Deal with the Devil" where he found that bond funds with the added layer of 12b-1 fees were systematically taking on more risk, as measured by standard deviation.

Because managers are usually fighting over a couple hundredths of a percent to get ahead of their peers--something many managers are compensated for--funds operating at an expense disadvantage have a greater incentive to take "slightly" more risk to make up ground lost on expenses. When what seemed like slightly more risk turned into a lot more risk, those pricier funds were punished.

Expenses are thus still a cornerstone of our analysis, but we're taking a closer look at the bonds, derivatives, and even questioning the "so-called cash" in portfolios.

3. "Risk management" can and does fail.
Most firms use risk-management techniques. They employ sophisticated models to help summarize and quantify the risks they are taking. They package the output in fancy terms like tracking error and information ratio. However, it's all too easy to lose sight of the fact that risk management is a tool, not a panacea. Too much reliance on risk-measurement systems can and does hurt a fund if management relies on it too blindly. There is no way in which any risk-management system can appropriately account for every possible kind of outcome, especially those outcomes that have never happened in the past.


Firms known for industry-leading bond risk analytics, such as BlackRock and Fidelity, didn't dodge the big problem areas and posted some disappointing results. On the flip side, PIMCO, which also relies heavily on risk models, did much better because the firm has a well-oiled "gut-check" mechanism in place to run counter to what historical data may be signaling. It conducts an annual investment forum where the team of PIMCO investment professionals and invited guests shape their near- and long-term outlooks. Top-down considerations factor into their daily activities, too, leading to a mindset that opened the door for forward-looking inputs to make their way into the firm's risk models.

In a recent conversation about this topic, my colleague Eric Jacobson drew a comparison with a fighter pilot. Given the scads of electronics with which they now have to grapple, pilots often develop tunnel vision. A lot of training is therefore built around the need to maintain "situational awareness." At some point, it may become necessary to put the dogfight on hold to just look out the window and realize that you're flying upside down and toward a mountain.

We never gave risk models too much credence unless they were accompanied by a more fundamental and cultural aversion to risk. Yet, we've gained a greater appreciation for the danger risk models can introduce when they become a crutch for managers, leading them to believe they've accounted for the full extent of what could go wrong and not being as honest with shareholders or themselves about what may not be captured by the models.

4. There is a dear price attached to daily liquidity.
Liquidity has taken center stage in this environment. It is a big (and costly) consideration for banks, insurance companies, and corporations carrying debt--as well as for mutual funds. The underlying premise is simple and the same for all of them: If there's a mismatch between demands for money and the ability to supply it, there's vulnerability.

Daily liquidity is one of the best (and worst) things about mutual funds. There's real comfort and convenience in knowing you can cash in your shares on any given business day. But, it also introduces a big risk and one that doesn't often show its face, especially given that mutual funds have experienced money coming in more than they've had to deal with money going out--for decades. In the most extreme (and unlikely) case, all of a mutual fund's shareholders have the right to cash in all of their shares (all at once), but the fund is limited in its ability to turn around and sell its entire portfolio of securities in the open market. Some of the biggest problems have come from funds that were seeing investors flee at a faster clip than they could sell securities to meet those redemptions.

Because this had so rarely been a problem for mutual funds in the past, we did not adequately foresee just how serious a difficulty it could present to the mutual fund structure itself in a time of severe stress. Morningstar is calculating estimated fund flows now, which will help us flag funds facing outsized pressure from outflows. In addition, we plan to keep a more careful eye on portfolio changes from quarter to quarter and ask more about liquidity in manager interviews.

Conclusion
We're carrying all of these lessons into our analysis of mutual funds, but it's important to note that the key tenets of our approach remain the same. We always have and still do rely on a deep dive into a fund's manager, strategy, portfolio, stewardship, and fees to assess a fund's attractiveness for the long haul. We still believe that analysis of those factors leads to better results over long holding periods and that has proven to be the case with our Fund Analyst Picks. At the same time, we recognize there's always room for improvement and we're committed to staying on a continuous learning curve.


http://news.morningstar.com/articlenet/article.aspx?id=287023

How Bear Markets End

Posted April 7, 2009 05:15 PM (EST)

How Bear Markets End

Doug Short has taken a detailed look at the 10 bear markets and bear-market-recoveries since 1950. You can click through a slideshow showing each of these periods in detail here >

Importantly, Doug's charts do not include the horrific bear market of 1929-1932, which puts all of the post-war ones to shame. To get a more detailed sense of how that one "bottomed," click through to the last slide, which overlays our current bear market on top of the three nastiest ones in the last century.

Some key points:

* The 10 bear markets since 1950 have bottomed down 20% to 57% (the low in the current cycle) off the peak. The current bear is by far the worst since the Great Crash, which bottomed down 89%.

* The bear phases of these markets lasted from 3 - 30 months (we're currently in month 17). The drop from 1929-1932 was also about 30 months.

* Most of these markets offered some sort of "retest" of the low. Importantly, however, some did not. (As always, beware confident "technical" analysts)

* As this additional chart shows, the S&P is now trading about in-line with its long-term price trend after 15 years of trading above it. So even if we have put in the bear-market bottom, it is likely that the S&P will eventually trade below trend for a considerable period of time.

Click to Start >

See Also: 140 Years Of Bull And Bear Markets

Understanding Bear Markets

Understanding Bear Markets
What they are, how they work, and what they mean for your investments

Last year, I wrote an article called "Understanding a Bear Market". The first sentence read, "If you've only begun investing in the past few years, you aren't aware of what a bear market is." Unfortunately, that isn't the case anymore. In the past few months, Wall Street has reeled, stumbled, picked up speed, fallen on its side, and gone in circles. Professional and average investors alike have no idea where the market is headed, but everyone seems to have an opinion.
In light of the recent events on Wall Street, here's an update to that article.

What is a bear market and what causes them?

By definition, a bear market is when the stock market falls for a prolonged period of time, usually by twenty percent or more. It is the opposite of a bull market. This sharp decline in stock prices is normally due to a decrease in corporate profits, or a correction of overvaluation [i.e., stocks were way too expensive and needed to fall to more reasonable levels]. Investors who are scared by these lower earnings or lofty valuations sell their stock - causing the price to drop. This causes other investors to worry about losing the money they've invested, so they sell as well... and the vicious cycle begins.
One of the best examples of such an unfriendly market is the 1970's, when stocks went sideways for well over a decade. Experiences such as these are generally what scare would-be investors away from investing [which, ironically, keeps the bear market alive... since there are no buyers purchasing investments, the selling continues.]

How do they affect my investments?

Generally, a bear market will cause the securities you already own to become undervalued. The decline in their value may be sudden, or it may be prolonged over the course of time, but the end result is the same: What you already own is worth less [according to the market.]

This leads to two fundamental truths:
1.) A bear market is only bad if you plan on selling your stock or need your money immediately.
2.) Falling stock prices and depressed markets are the friend of the long-term investor.
In other words, if you invest with the intent to hold your investments for years down the road, a bear market is a great opportunity to buy. [It always amazes me that the "experts" advocate selling after the market has fallen. The time to sell was before your stocks lost value. If they know everything about your money, why they didn't warn you the crash was coming in the first place?]

So what do I do with my money in a bear market?

The first thing you need to do is to look for companies and funds that are going to be fine ten or twenty years down the road. If the market crashed tomorrow and caused Gillette's stock price to fall 30%, people are still going to buy razors. The basics of the business haven't changed.
This proves the third fundamental truth of the market:
3.) You must learn to separate the stock price from the underlying business. They have very little to do with each other over the short-term.
When you understand this, you will see falling stock markets like a clearance sale at your favorite furniture store... load up on it while you can, because before long, the prices will go back up to normal levels.

Copyright © 2002 Joshua Kennon

http://beginnersinvest.about.com/library/weekly/n031701.htm

Bull and Bear Stock Markets Two Sides of Same Coin

Bull and Bear Stock Markets Two Sides of Same Coin
By Ken Little, About.com

Bull and bear stock markets are two sides of the same coin.
Long-time investors know that bear markets are setting up the next bull market.
They also know that bull markets don’t run forever.
The longest running bull market ever was from 1990 – 2000.

Bull or Bear Market
It is impossible to know when a bull or bear market is officially over except through the 20-20 vision of history.
All bull and bear markets will exhibit periods that look like reversals, but are just momentary before the bull or bear regains control.
We now know that the bull market ended in March 2000, but at that moment, it wasn’t clear the party was over.
The three-year bear market that followed was pushed by the tragedy of 9/11 and a recession.

Bottom of Market
CNN pointed out that the Dow bottomed out at 776 in October of 2002.
From that point, the market has gone on to record heights.
Long the way, there have been some significant dips, but followed by a continuation of strong upward pressure.
This is all easy to see now, but when you are gasping for air as your portfolio value plummets, it’s not so easy to step back for perspective.
In the end, good companies have a better chance of weathering storms the sweep the market and the economy.

Necessary Bears
Bear markets perform the necessary service of deflating values and sweeping the market clean of stocks that are weak and riding on fads alone.
Your faith in solid fundamentals will usually pay off over time, but even a great company’s stock can get banged around in a tough market.
The lesson here is that stocks, as illustrated by the Dow, are good long-term investments, but dangerous short-term bets.

Comment: According to Suze Orman, we are in a secular bear market starting from the year 2000. She opines this will last 15 years. In between 2000 and 2015, there will be the occasional cyclical bull market lasting a few months to a few years.

See More About:
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http://stocks.about.com/od/understandingstocks/a/1009bull.htm

**4 Lessons from the Financial Crisis

Complete Coverage Ask the Expert Retirement questions answered


4 lessons from the financial crisis

By Walter Updegrave, Money Magazine senior editor
November 17, 2008 5:13 pm

If you can learn from the mistakes of others, now is a great time to be an investor.

Question: I’m inexperienced when it comes to investing, but I want to build a more secure financial future. What tips or suggestions do you have for a young investor like me? —Caleb Bond, Denver

Answer: It’s a great time to be starting out as an investor. Yes, I know that might sound odd, given that the market and the economy are in shambles. But the fact that people are so fearful and the outlook is so uncertain can also have its advantages.

For one thing, much of the excess has been wrung out of stock prices over the past year or so. And while this hardly insures a quick rebound, the money you invest today is much more likely to earn a higher return than if you had invested before the meltdown.

Even more important, though, is that you now have a better sense of the real risks of investing. People who gain their investing experience during bull markets can easily be lulled into a false sense of security. They know that severe downturn occur and maybe could occur again, but the possibility of one happening to them seems remote.

Today, however, all you’ve got to do is look around you to see that risk is real, it can be devastating and it must be respected.

That said, there’s also the danger that someone surveying today’s scene might take away the wrong lessons. Already, some people are concluding that stocks, or financial assets in general, are just too risky. When it comes to important goals like retirement, they say, the experience of the last year or so shows you should stick to the most secure investments, FDIC-insured CDs and the like.

But that’s an overreaction. Risk is a natural part of investing, a part of life, for that matter. Eliminate it and you eliminate opportunity. The key is to understand how much risk you’re taking and manage it.

With that in mind, here are four lessons I think beginning investors should take from the financial crisis and apply to their investing decisions now and in the years ahead. Come to think of it, I think experienced investors should consider them as well.

Financial success isn’t just about investing.

We kind of lost sight of this fact because returns on financial assets had been so good from the early 1980s through the late ‘90s. And even after the dot-com bust we had another five-year bull run in stocks, not to mention heady gains in the real estate market. It became easy to assume that we could achieve financial goals like a secure retirement with a minimum of savings because we could count on the compounding effect of years of high returns.

That was always an unsound strategy, but it’s only now becoming clear how flawed. In fact, as a study by Putnam investments showed a couple of years ago, saving is just as important for building wealth, if not more so. We can’t be sure of the size of the investment gains we’ll earn, and we don’t have nearly as much control over them as we used to think. But we have much more control over how much we save.

And by saving more, we gain two big advantages: we don’t have to invest as aggressively to build a retirement nest egg or reach other financial goals; and, by socking more money away, we’ll have more of a cushion in the event of setbacks in the market.

Simplicity is better than complexity.

If I could ban two words from the vocabulary of investors, it would be these: “sophisticated investing.” I think more harm has been done by investors trying to boost their returns by creating arcane investing strategies or buying complicated investments they don’t understand than all the investment con men and rip-off artists combined.

I don’t want to sound like a Luddite. I’m all for using tools, calculators and software to help you create a retirement plan and an investing strategy. But you’ve also got to maintain a healthy sense of skepticism about how much fancy algorithms and intricate computer simulations can do.
Fact is, the more complicated your investing strategy is, the more things there are that can go wrong, and the harder it will be for you to monitor and maintain it. A simple mix of stock and bond mutual funds may not be the sexiest strategy around. But if you use good common sense in putting that mix together - i.e., you diversify broadly as we recommend in our Asset Allocator tool - it will serve you well over the long term.

Allow for the possibility you may be wrong.

One of the most notable features of the real estate bubble was how sure people felt that prices would continue to go up, up, up. At the peak of the housing mania, I remember getting emails from firms that were inducing individuals to open self-directed IRA accounts so that they could then invest their IRA money in real estate. I wrote a column at the time suggesting that this might be a sign that the real estate market was getting frothy and warning people about staking their retirement on the housing market.

I got a lot of feedback on that column, alas, most of it from people who wanted to know how they could get in touch with those firms that could help them get rental houses into their IRAs. And although I and others pointed out that house prices had gone down in the past and stayed down for quite a while after big run-ups, no one seemed to believe that it could happen again.

Which is why it’s always important when you’re investing to give yourself a reality check. Are your assumptions realistic? Is there something you’re overlooking? Could you be wrong? What would the fallout be if you are? And, perhaps most important, are you interested in this investment because it fits in with your overall strategy or because it’s the investment everyone is talking about? Don’t get too euphoric during upswings or depressed during downturns.

When things are going well and the economy and the markets are on a roll, it’s easy to let the excitement cloud your judgment. After all, everywhere you look - the double-digit gains in the fund listings, the upbeat news in the newspaper’s business section, the cheerful banter on cable TV financial shows - you get positive reinforcement. You almost can’t help but believe that the good times will continue to roll.

So you begin to boost the percentage of stocks in your portfolio and put more money than you should into hot investments that now seem like good bets, such as emerging market stocks. In other words, you begin taking on more risk, although, you probably don’t see it that way. How can investing be risky when it seems the market only goes up?

This process kicks into reverse, of course, when the markets and economy change course and begin falling apart. Then the prevailing gloom and doom dominates your thinking. Everywhere you look - the double-digit losses in the fund listings, the downbeat news in the business section, the somber mood and dire pronouncements on the cable TV financial shows - you get negative reinforcement.

You become convinced that the hard times will get even harder. So you sell out of stocks and move into safe-haven investments you sneered at during boom times - bond funds, money-market funds, stable-value funds, even CDs. And you no doubt see this as a move to reduce risk. After all, aren’t you safer getting out of the market when it only seems to keep going down?
But there’s a risk here too: you may be selling at the worst time and positioning yourself to miss the recovery when it occurs.

These feelings and reactions are natural. We’re human. But it’s no news flash that markets and economies move in cycles. That we go through periods of excess on both the upside and downside. We’ve gone through such episodes before and we will again. So ideally you want to set a strategy that factors in such fluctuations, and then avoid the urge to abandon your strategy when your emotions are screaming you to do so.

I can’t guarantee that steering clear of the euphoria that leads to aggressive investing at market peaks and avoiding the despair that causes you to be too conservative after the market falls apart will assure you’ll earn the highest returns or sidestep big losses. But by doing so, you’ll probably be less vulnerable heading into downturns, and better positioned to take advantage of the upswing when it occurs.


Filed under Uncategorized22 Comments Add a Comment

I just want to caution everyone that before jumping back into the market that everyone has their credit cards paid off. Too quickly we forget that one of the lessons out of all of this is that we cannot live beyond our means.
Posted By Matt Malinowski, Lethbridge AB: November 19, 2008 12:04 am

Why would anyone advise someone to invest in the stock market now. In 1929 there was a major down turn in the market. And in the end the stock market DOW dropped over 80%. We are in a worst crisis than in 1929. The dollar is about to slide over a cliff. And the tax base is being eroded away so the government won’t be able to pay the interest on our loans. Next year we won’t be able to have foreigners buy our bonds. Because the feel they would be too risky because of all our debt. The credit rating of the US will be downgraded. With all the spending we are looking at a hyperinflation senario similar to Wienmar Germany. The article is dreamland. Tell the kid to invest in silver/gold. In the depression you could buy a house for a couple of ounces of gold and in Wienmar germany you could buy a house for one quarter ounce of gold.
Posted By Kevin Rathdrum, Idaho: November 18, 2008 11:18 pm

Save at least 10% of everything you earn. Like Buffett says, be greedy when others are fearful and fearful when others are greedy. Learn and follow the Elliot Wave Theory. Read and learn about investing. Develop and strictly adhere to a long term investment plan. Learn and apply the dynamics and psychology of market swings and how they work and learn how to make them work for you. In essence, educate yourself and apply your knowledge on a long term basis.
Posted By Ramundo A, Lincoln, Nebraska: November 18, 2008 9:53 pm

I’ll tell you what, its been black friday for a few weeks now and I’m loading up on these bank stocks. In a few years it’l rebound and I believe what I put in it over the next year will at least double my value. at least. its on sale! citi for example is 75% off!
Posted By Anonymous: November 18, 2008 8:02 pm

Nice article. Sad to see all these people near retirement that had more than half of their stash in stocks and real estate. What’s even sadder is considering the moral hazard of the government now helping “too much.”
Stock Market has some interesting features, not widely advertised, like a real return since 1871 less than 2% on price appreciation alone (most people don’t believe this, but take the SP500 data since it started and calculate it yourself). On the other hand, including dividends, real return is 6.4%. Kind of like a bond, to support the argument of another writer to this post (but a bond with a heckuva a lot of volatility).
It also seems to have a 35 year oscillation in peaks and troughs, and the next trough is 2018. Hopefully past performance doesn’t predict future results!
Posted By Dave, Houston, TX: November 18, 2008 7:26 pm

I think what Walter is trying to say is :
Keep it simple to keep it manageable.
Meanwhile:
There has been a phrase bandied about in the press “too big to fail”.
I think that phrase needs to be changed to “too big for their britches” because “Wall Street” has been demanding “more liquidity” from the Federal Government for years.
I think that was a cover-up for “we gambled and made some bad bets so we need to borrow more money even cheaper so when we win a big one we can pay you back but meanwhile we need to pay ourselves several million dollars because we are such darn smart and clever people.”
So when you do your own investing, don’t get too big for your britches thinking you are smarter than “Wall Street” because they have more OPM than you do.
OPM being “Other People’s Money”
Posted By Jason Stoons, Austin TX: November 18, 2008 7:10 pm

One fundamental problem with our economy and Government is the unhealthly focus on the spenders–we bend over backwards to encourage people to go into debt, while at the same time practically eliminate all incentives to save our money (painfully low savings rates)–America’s problems will continue to worsen as long as we continue to spend beyond our means…and I’m talking about both Government and personal spending.
Posted By Nairb Sreoom, Biloxi, MS: November 18, 2008 5:21 pm

The current economics is really a paradigm shift to some basics, that will really develope into a new reality, a new way of looking at things. The promoters of sliced and diced investment “opportunities” have been found out. The repercussions of this failure are yet to be determined. Your article really tells us that it is back to basics, keep your investment strategy simple and understandable. I think the future will be the best time in our history, but only after a lot of lessons are learned and pain obsorbed. If the government bails us out too much, we won’t have learned anything.
Posted By Don Miner, San Francisco,: November 18, 2008 4:41 pm

It’s a shame that there is no TV show about simple, sensible investing principles: keeping costs low, tax efficiency high, diversification high, and allocation appropriate. Although they are the optimal strategy for nearly everyone, can you imagine watching a show that told you to do the same basic thing every week for years on end? LOL They could call it “Don’t just do something, stand there”!
Posted By John, Phila PA: November 18, 2008 3:56 pm

forgetting reality because you are chasing pie in the sky is a tough one. Any reference librarian can help you look up the long term advantage that large cap stocks have delivered over government bonds — it is only about 5%.
Every time you think you’re going to do significantly better than that 5% [before taxes, too] you have to know that you’re chasing pie in the sky.
Can it be done? sure — by experts. Then you have to ask yourself if you’re an expert. something like 99.95% of us are not.
If you’re not an expert, can you hire an expert? Absolutely — if you have millions to invest. However, for the average family, the expert needs to get paid so much that you can’t afford him or her. That means you’ll get average results. period.
Build your plan as if you’ll get average results. Then start becoming an expert and maybe you’ll be able to do better than your plan.
Posted By Spock_rhp, Miami, FL: November 18, 2008 3:10 pm

Good Points. On the whole we forgot about risk. We forgot that trees DO NOT grow forever into the sky. The signs were there for the Dot Com bust and not the housing/sub-prime bust. We forgot to look both ways before crossing the ’street’ and got blind-sided.
I’m 55 years old and have been investing since the early 1980’s and went through the crash of 1987, but this time I see with different eyes. All of my equities will remain fully invested, and will be left alone “to fend” for themselves…hopefully their value will rebound in the next 10 or 20 years. I was 80/20 stock to bonds…that’s now become 70/30 ratio. I plan to continue to save 21% of my income, but these monies are going into a GIC fixed instrument within my company 401(k). The other thing that I am doing differently, is to get back (sold my house in April 2008)into Real Estate, and make it a larger percent of my investments.
Good luck to all!
Posted By BIZ, Dunedin Florida USA: November 18, 2008 2:11 pm

All this advice is great if you have a pension to fall back on in hard times IN ADDITION to your 401K.If you don’t, you can’t save enough for a comfortatble retirement before turning 70 with all this brutal cycling.
Posted By Pat Savu Maplewood, MN: November 18, 2008 2:10 pm

The present meltdown has also shown us how unethical many of the financial corporations are. From the companies that rated AIG “AAA” to the derivatives that were “invented” for fast profits and big bonuses, we have learned that Wall Street lies, cheats and steals, without penalty.
Posted By kate, boston, MA: November 18, 2008 1:50 pm

The author is wrong about “much of the excess wrung out” - PE ratios are still excessive and there’s more downside to come.
Posted By Jack Thomas, Tucson, AZ: November 18, 2008 12:55 pm

It is well written , it truly is the fact , putting the bad to the past ,thought the worst could not be over yet , you could expect another 20 % lower values in the stock market ,look out for the DOWJONES to come to level of 7000 to 7400 to enter the market and stay in the stock of atleast 6 months .to get real returns , if one can stay invested longer , better returns are expected .the market will come back to its original level in 3 years , there could not be a better time to get in to the market if one has the cash liquidity ,
Posted By mansoor ,moradabad ,india: November 18, 2008 12:30 pm

Excellent article
Posted By Anonymous: November 18, 2008 12:29 pm

Great aticle , the only way i can recover capital losses is by jumping back in and yousing my capital gains as tax write offs , it will take some time im not going to miss the rebound ive lost to much .
Posted By Bernie Blyth , Australia: November 18, 2008 12:28 pm

I think these are all good and positive ideas, but if we continue to think that the stock market will again go upwards like it did in the dot com peak and the housing market boom, we may be in for a surprise. With all of these bailouts and the companies not doing what they are supposed to do with taxpayer’s money, big business has learned nothing from this. All they will do is blow it and then turn to the government for help…AGAIN.
Posted By Lee, Shreveport, La: November 18, 2008 11:18 am

My advisor told me,rich,is when you marry it, inherit it or compound interest. Re invest the dividends back into the stocks. I believe him, and that is what I am doing, but only good stocks,like GE,Bristol Myers, and yes Visa is a great buy right now. As long as you have a cash reserve,buying into the good stocks, remember, the stock market has thrown out the “baby” with the wash. Take advantage of the blue chips.
Posted By Ken Wayne, Boca Raton,Fl: November 18, 2008 11:17 am

I agree with article - thanks
Posted By Terrace, Gulf Breeze, FL: November 18, 2008 10:22 am

all these principles are fine to write about but not practical given the current scenario. there can be only one Warren Buffet and one Bill Gates. while your house is burning you cant read or remember fire prevention rules or bye laws you have to act.Moreover today’s situation is s spill over of years of faulty financial expansionary policies & it will take a long time to reassert fundamentals which are neither so distorted nor flimsy
Posted By Aj missassauga ont.: November 18, 2008 10:09 am

Excellent article. Let’s remember that fear builds on fear and that is exactly what we’re seeing on today’s market. The smart investor today will analyze current fear trends and gradually inject back into the market when the underlying causes for concern have been dealt with.
There is always inherent risk in investment, but personally I’m excited about the opportunities that this is bringing. Also, I hope that a new generation of investors will be more atuned to the risks involved with investment and will be more ethically inclined in the future.
Posted By Mitesh Vashee, Dallas TX.: November 18, 2008 10:00 am
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http://asktheexpert.blogs.money.cnn.com/2008/11/17/4-lessons-from-the-financial-crisis/

Investment Considerations in a Bear Market

Investment Considerations in a Bear Market

Making Smart Decisions When Markets Are Volatile Can Pay Off
By Jeremy Vohwinkle

The idea of investing is to make your money grow, but there are times when the stock market doesn’t want cooperate. Regular market fluctuations are common and expected, but extended periods of decline can strike fear in even seasoned investors. These bear markets can last months or even years. So, what should you do when faced with a bear market?

Examine Your Investment Objective

The first thing anyone should do before making changes to their portfolio is to think about what the purpose of the investment is. Is it money for retirement? College savings? A down payment on a house? Each of these investment goals have to be treated differently, and you need take into account what the money is going to be used for before you can decide if any changes need to be made.

The investment objective is important because it primarily deals with a specific time horizon. If you’re 35 years old and saving for retirement, you know that your money has a few decades left to grow. On the other hand, if you’re 35 and preparing to send your child off to college in 8 years, that is a completely different scenario.

Consider Your Risk Tolerance

Most people make changes to their investments because of losses. When you begin to see your account drop in value, it’s only natural to want to stop this from happening. Unfortunately, this type of behavior is reactionary, and it can often do more harm than good.

If the idea of seeing a loss on your statement has you feeling uneasy and ready to make changes, then chances are you’re taking on more risk than you should be. You should be allocating your investments in a way that minimizes risk, maximizes returns, and allows you to sleep at night regardless of what the market is doing. If you’re losing sleep because of a few bad days in the market, it’s time to reconsider how much risk you’re willing to take.

Don’t Chase the Market

You’ve probably heard the saying “buy low and sell high” many times, and we all know that’s how you make money, but the reality is that most people do just the opposite. The average investor will happily put more and more money into the market, and take on more risk when the market and economy is strong, and pull back or stop investing at all when the markets are heading south.

This is the opposite of what you want to do. If you’re only saving and investing when the markets are doing well, and investing little or selling stocks when the markets are down, you’re buying high and selling low, which is a very ineffective way to make money.

If you have a regular investment plan through your 401(k) or individual retirement accounts, keep those investments flowing through good times and bad. Because you’re investing on a regular and frequent interval, you’re buying stocks when they are up, down, and everywhere in-between. This is called dollar-cost averaging, and it is a great way to take some of the volatility out of your portfolio and maximize your overall returns.

Rebalance Your Portfolio

When the markets experience an extended period of growth or decline, it can throw your portfolio out of its original investment mix, or asset allocation. For example, if you’ve determined that a 70% stock and 30% bond portfolio is suitable for you and the stock market has taken a bit of a dive, you might find that after just six months, your investment mix might be at 60% stocks and 40% bonds, or even a 50% mix.

Ideally, you want to maintain your portfolio so that it remains close to your target investment mix. By rebalancing to your target mix, you’re forced to sell some of the investments that have done well, and buy more of the investments that haven’t done as well. This is allowing you to buy low and sell high instead of the reverse.

Shore Up Your Short-Term Investments

Investing your short-term savings takes a different approach from investing for retirement or other long-term goals. The general idea here is not to generate as much money as possible, but instead it is more focused on safety of principal while making as much money as possible.

When the economy is struggling, it pays to have a well-funded emergency fund. A weak economy can put some uncertainty in the air in terms of job security and obtaining credit. This is where your savings can come in handy. If you have the cash on hand in the event of an emergency, you don’t have to worry about using credit cards or possibly hurt your credit score.

So, when it comes to your savings, whether an emergency fund, money for a down payment on a house or a vehicle, or just the extra spending money you like to keep on hand, you want to make sure it’s safe and working as hard as it can for you. There are a number of places to safely keep your cash, so you’ll want to explore all the different options. It’s also a good idea to make sure your money is FDIC insured so that if times get really tough and your bank goes under, you’ll be protected.


http://financialplan.about.com/od/personalfinance/a/BearInvesting.htm

Stockpicking in a bear market using cash bailout potentials

Medium-term horizon
Long-term horizon
Cash bailout potentials
Fundamental strength of the business
Dividend
Capital appreciation potential
Privatisation potential

------------

Stockpicking in a bear market can be a hazardous business. Picking bottoms is not easy. Beware of intermediate bottoms and long-term bottoms.


One strategy during the bear market is to avoid risk and not hold stocks altogether. This is also the reason why we have a bear market at all --- risk aversion leads to lower volumes and the stock prices drop by gravity due to lack of support.


But yet, if we define risk* as the potential loss on investment over say 3-5 years, then buying stocks during a bear market could be a low-risk proposition indeed (because you are buying at a lower base and hence risk of losing is lessened over the long term), assuming that the bear cycle reverses in several years.

-----------

A good model for picking stocks in a bear market would be to examine the cash bailout potential of a stock over the medium to long term. The general idea is to view a stock with regard to its potential to allow the holder to eventually bail out. Under this umbrella of "cash bailouts" are:

• selling in the open market for capital gains
• dividends and
• privatisation.

This way of viewing a stock is especially useful in a bear market where most small-cap stocks may be thinly-traded and selling out of them may be difficult. Yet, illiquid small-caps often offer the best potential gains.

----------


Two-horizon approach to picking these stocks in a bear market are:

• the medium-term horizon (6-12 months) and
• the long-term horizon (3-5 years).

Under each of these horizons, examine the cash bailout potential of the stock.

----------

Medium-term horizon

One should expect a lower potential returns for the medium term as opposed to the long-term horizon. Under the medium-term horizon, two main factors to look out for are

• privatisation potential and
• dividend yield.

These are the two main cash bailout avenues in a recession/bear market where liquidity and capital gains opportunities might be limited.

Dividend streams tend to be more easily predictable especially for older companies, and high dividends, perhaps in excess of 5-10% yield, would be a good clearing mark for potential stockpicks.

Privatisation potential is harder to judge. Companies with the following:

• the usual "good earnings/business" criteria
• tight ownership under a strong cash-rich owner,
• an operating niche or desirable brand name and
• steady free cashflows (operating cashflow minus investing cashflow)

would attract potential privatisation offers from parties such as the main shareholder, business competitors or private equity funds.

----------

Long-term horizon

Under the long-term horizon, capital gains look like a more viable, and probably the most profitable, cash bailout avenue. This is of course the preferred bailout avenue of the long-term growth investor.

Two main issues must be considered with respect to stockpicking for this horizon:

• firstly, how many times can the stock price appreciate;
• secondly, can the company's fundamentals survive the recession unblemished.

For those targeting 3-5 years down the road, aim to pick a stock with the potential to be at least a 4-5 times multibagging potential. That would translate to about 30-40% annualized gains. This is quite ambitious but is also a good way to filter out the real bargains among the many cheap pennies floating around in a bear market. Of course, the devil is in the details: the judgment of appreciation potential is critical and clearly the selected stock might not fulfil its hoped-for potential.

For the second issue, it boils down to an examination of the company's accounts and operating business. The balance sheet (complete with footnotes) is the single most important source of information to make the judgment. Things to look out for would be:

• heavy debt,
• contingent liabilities (under footnotes),
• consistently negative operating cashflows and
• insider selling.

As Warren Buffett says about car racing, to finish first, you must first finish.

------------

Ideally the selected stock would be satisfactory on all counts, both medium-term and long-term. Of course, it may be difficult to find one has multi-bagger potential and yet has clear indications of being taken over. Or it might pay miserly dividends.

The dividends and the fundamental strength of the business to negotiate through the recession override the other two factors, privatisation or capital appreciation, in terms of importance.

Dividends and fundamental strength of the business are the ones that are most easily judged from current and past data. These can be judged objectively, and provide a clear operating basis to fall back on should privatisation or capital appreciation not work out. In short, they provide a floor for the stock price. Look out for these two parameters most of all.

----------

*Risk

For long term investors with a longer investing horizon, we define risk as the potential loss on investment over say 3-5 years.

The standard definition of risk as price volatility is more appropriate for short-term leveraged players.

----------

Reference: http://mystockthoughts.blogspot.com/2008/11/stockpicking-in-bear-market.html

7 Lessons To Learn From A Market Downturn

7 Lessons To Learn From A Market Downturn
by Stephanie Powers (Contact Author Biography)

You can never really understand investing until you weather a market downturn. The valuable lessons learned can help you through the bad times and can be applied to your portfolio when the economy recovers. Listed below are some common investor experiences during tough economic times and the lessons each investor can come away with after surviving the events.


Lesson #1: Evaluate Your Egg Baskets

You're pulling your hair out because everything you invest in goes down. The lesson: Always keep a diversified portfolio, regardless of current market conditions.

If everything you own is moving in the same direction, at the same rate, your portfolio is probably not well diversified, and you could stand to reconsider your asset-allocation choices. The specific assets in your portfolio will depend on your objectives and risk-tolerance level, but you should always include multiple types of investments. (Read Personalizing Risk Tolerance to find out how much uncertainty you can stand.)

Taking a more conservative stance to preserve capital should mean changing the percentages of holdings from aggressive, risky stocks to more conservative holdings, not moving everything to a single investment type. For example, increasing bonds and decreasing small-cap growth holdings maintains diversification, whereas liquidating everything to money market securities does not. Under normal market conditions, a diversified portfolio reduces big swings in performance over time. (For more information, read Diversification: It's All About (Asset) Class.)


Lesson #2: No Such Thing As A Sure Thing

That stock you thought was a sure thing just tanked. The lesson: Sometimes the unpredictable happens. It happens to the best analysts, the best fund managers, the best advisors, and, it can happen to you.

The perfect chart interpretation, fundamental analysis, or tarot card reading won't predict every possible incident that can impact your investment.

• Use due diligence to mitigate risk as much as possible.
• Review quarterly and annual reports for clues on risks to the company's business as well as their responses to the risks.
• You can also glean industry weaknesses from current events and industry associations.

More often, an investment is impacted by a combination of events. Don't kick yourself over unpredictable or extraordinary events like supply-chain failures, mergers, lawsuits, product failures, etc. (Learn how to find companies that manage risk well in The Evolution Of Enterprise Risk Management.)


Lesson #3: Proper Risk Management

You thought an investment was risk-free, but it wasn't. The lesson: Every investment has some type of risk.

You can attempt to measure the risk and try to offset it, but you must acknowledge that risk is inherent in each trade. Evaluate your willingness to take each risk. (See Measuring And Managing Investment Risk for information on keeping necessary risk under control.)


Lesson #4: Liquidity Matters

You always stay fully invested, so you miss out on opportunities requiring accessible cash. The lesson: Having cash in a certificate of deposit (CD) or money market account enables you to take advantage of high-quality investments at fire sale prices. It also decreases overall portfolio risk.

Plan ahead to replenish cash accounts. For example, use the proceeds from a called bond to invest in the money market instead of purchasing a new bond.Sometimes cash can be obtained by reorganizing debt or trimming discretionary spending. Set a specific percentage of your overall portfolio to hold in cash. (Learn how to take advantage of the safety of the money market in our Money Market tutorial.)


Lesson #5: Patience

Your account balance is lower than it was last quarter, so you overhaul your investment strategy before taking advantage of your current investments. The lesson: Sometimes it takes the market an extended period of time to bounce back.

Your overall portfolio balance on a given date is not as important as the direction it is trending and expected returns for the future. The key is preparedness for the impending market upturn based on an estimated lag time behind market indicators. Evaluate your strategy, but remember that sometimes patience is the solution. (Doing nothing can mean good returns. Find out more in Patience Is A Trader's Virtue.)


Lesson #6: Be Your Own Advisor

The market news gets bleaker every day - now you're paralyzed with fear! The lesson: Market news has to be interpreted relative to your situation.

Sometimes investors overreact, particularly with large or popular stocks, because bad news is replayed continuously via every news outlet. Here are some steps you can follow to help you keep your head in the face of bad news:

• Pay attention and understand the news, then analyze the financials yourself. (Read What You Need To Know About Financial Statements for help.)
• Determine if the information represents a significant downward financial trend, a major negative shift in a company's business, or just a temporary blip.
• Listen for cues the company may be downgrading its own expected returns. Find out if the downgrade is for one quarter, one year or if it is so abstract you can't tell.
• Conduct an industry analysis of the company's competitors.

After a thorough evaluation, you can decide if your portfolio needs a change. (For more information, read Do You Need a Financial Advisor?)


Lesson #7: When To Sell And When To Hold

The market indicators don't seem to have a silver lining. The lesson: Know when to sell existing positions and when to hold on.

Don't be afraid to cut your losses. If the current value of your portfolio is lower than your cost basis and showing signs of dropping further, consider taking some losses now. Remember, those losses can be carried forward to offset capital gains for up to seven years. (For more information, read Selling Losing Securities For A Tax Advantage.)

Selective selling can produce cash needed to buy investments with better earnings potential. On the other hand, maintain investments with solid financials that are experiencing price corrections based on expected price-earnings ratios. Make decisions on each investment, but don't forget to evaluate your overall asset allocation. (Read more in Asset Allocation: One Decision To Rule Them All.)


Conclusion

Downward stock market swings are inevitable. The better-prepared you are to deal with them, the better your portfolio will endure them. You may have already learned some of these lessons the hard way, but if not, take the time to learn from others' mistakes before they become yours.

Read Adapt To A Bear Market to learn how to structure your portfolio to withstand tough economic times.

by Stephanie Powers, (Contact Author Biography)

Stephanie Powers has worked in the financial services industry since 1995. She uses her experience as a financial advisor to write investment and personal finance articles that educate readers and help them make informed decisions. Her credentials include FINRA securities licenses, an MBA, and experience consulting with individuals and businesses for Edward Jones Investments and Merrill Lynch. Previous experience includes working as a business consultant for American General Insurance and IBM.In her spare time, Stephanie enjoys traveling, playing golf, and genealogy research.

** This article and more are available at Investopedia.com - Your Source for Investing Education **
http://www.investopedia.com/articles/basics/08/lessons-market-downturn.asp?partner=basics

Embracing a bear market

Over a 10- or 20- or 30-year investment horizon, Mr. Market's daily dipsy-doodles simply do not matter.

In any case, for anyone who will be investing for years to come, falling stock prices are good news, not bad, since they enable you to buy more for less money.

The longer and further stocks fall, and the more steadily you keep buying as they drop, the more money you will make in the end - if you remain steadfast until the end.

Instead of fearing a bear market, you should embrace it.

The intelligent investor should be perfectly comfortable owning a stock or mutual fund even if the stock market stopped supplying daily prices for the next 10 years.

Paradoxically, "you will be much more in control," explains neuroscientist Antonio Damasio, "if you realize how much you are not in control." By acknowledging your biological tendency to buy high and sell low, you can admit the need to dollar-cost average, rebalance, and sign an investment contract.

By putting much of your portfolio on permanent autopilot, you can fight the prediction addiction, focus on your long-term financial goals, and tune out Mr. Market's mood swings.

Ref: The Intelligent Investor by Benjamin Graham

What should I do in a bear market situation?

The best strategy is to go for a holiday and let the market cool off.

When things have settled down, you may commence to do some bargain hunting.


Ref: Making Mistakes in the Stock Market by Wong Yee

What is a bear market?

It is a situation whereby share prices keep on falling lower and lower.

Although at a certain point in time share prices will head for a rebound, the rebound normally will not be sustained.

Thus, the downward escalation of share prices resumes as bad news keeps surfacing one after another.

Investors and speculators become jittery and sell their shares at a loss.

Bad debts become the order of the day and lawyers are busy issuing demand letters.

Suddenly, those smiling faces are replaced with sadness and a solemn mood.

Brokers also find themselves in trouble when clients fail to settle debts.

STOCK MARKET INDEX ----> falling -----> Low ------> New Lows----->

Scenario:
Bad news abound
Forced selling by brokers
Bad debts to be collected
Sad faces around

The bear isn't all bad. What exactly is a bear market?

http://www.douglasgerlach.com/clubs/askdoug/bearmarket.html

The Looming Bear

by Douglas Gerlach

Market headlines of recent days are using words that seem tailored to strike panic in the hearts of investors: fear, suffering, carnage.

Starting with the technology stocks of the Nasdaq, and now spreading even to the blue chip stalwarts of the Dow, this market sell-off is bringing us into territory that smells distinctively bear-ish. After enjoying years of great market news, it's unfamiliar territory for many of us.

But as Peter Lynch likes to point out, "When it's 15 below in Minnesota, they don't panic -- they just wait until spring." The market has gone up and down throughout its history, and it doesn't pay to panic when the market declines.

What exactly is a bear market? It's an extended period when stock prices generally decline. It can last for months, or even for years. A bull market is a period when stock prices generally increase. These terms originated back in the 1800s, but no one really knows how or why they came into use, nor why the bull came to symbolize periods of increasing prices while the bear represents downturns.

When you look at the market from a statistical perspective, you can see that it's very common for the market to experience some serious downturns. From 1928 through 1997, the S&P 500 declined in 20 of those 72 years. In eight of those years, it declined greater than 10 percent, and greater than 20 percent in four of the years. And that's not even counting the times that the market has declined greater than 10 percent or even 20 percent in the middle of a year and then recovered!

On the other hand, the S&P 500 has ended the year higher than it started out in 52 of 72 years. In 41 years, the S&P 500 ended up greater than 10 percent, and in 28 years, it closed the year with a 20 percent or greater gain.

But a bear market isn't all bad news. Sure, it can hurt when your portfolio takes a hit when stock prices fall. But you'd still better be prepared for the inevitable downturns in the stock market, and remember that the situation is only temporary, after all. In every instance when the overall market dropped, it returned and then grew to greater heights. In fact, the stock market has a 100 percent success rate when it comes to recovering from a bear market! The only thing to remember is that sometimes it takes longer for the bounce-back to occur.

If you follow a long-term approach to investing, then you know that patience is a virtue whenever you're investing in the stock market. It also helps to keep your vision focused on your long-term horizon whenever the market hits some turbulence. By using dollar cost averaging and by investing regularly, you can even make the bear market work for you by taking advantage of generally lower prices with additional purchases. Knowing the market's infallible past record, you can sleep easy -- even when other investors are panicking.

Who said it is impossible to make $$$$$ in bear market?

________________________________

Dear 陈全兴,

there r 2 choices for one to invest in bear mkt,

1) Buy high dividend yield blue chip stock esp those traded with PE < 10.

2)even if they r not high dividend payer, buy if blue chip selling to u @ around 7+-, it is still worth 4 consideration.

try to avoid property ,GLC n construction stocks, if u doubt , let see what happen to their shares price by end of this year or begining of next year ^V^

Oil n gas srctor also not a bad choice but u r advice to bottom fish them @ PE < 10 also for safe play.


http://www.samgang.blogspot.com/

http://samgang.blogspot.com/2008/07/v-who-said-it-is-impossible-to-make-in.html

_________________________________


I enjoy visiting the above blog. There are very good advice given on investing by Sam of this blog. I copy and paste here one of his posting above. The advice given are excellent and definitely safe. One can be grateful for such advice given expertly, freely and genuinely.

Goodbye, Bear Market?

http://www.kiplinger.com/columns/value/archive/2008/va0714.htm

"Believe it or not, history offers surprisingly good news about what the stock market will likely do from here. No, history doesn't always repeat itself, but, as the saying goes, it rhymes. So please don't cash in your stocks for CDs until you read the rest of this article. To ignore history would be folly."

"Do things seem worse than they were during other bear markets? If so, it's partly because of our tendency to forget the distant past and focus instead on the recent past. I submit that the events surrounding many past bear markets were at least as frightening as those of this one. I certainly remember the anxiety surrounding the 1987 crash, when the Dow Jones industrial average plunged 22.6% in one day—eclipsing the 1929 crash. I thought we might well enter a depression. Instead, stocks hit bottom less than two months later."

"Yet, soon after the onset of a bear market, the market generally has risen. One month after breaking the 20% threshold, the S&P had gained 3%, on average, during those nine bear markets. Two months later, it had risen 6%. on average. Three months later, it was up 5%, and six months later, the S&P had returned 7%. Twelve months after the initial decline, the market had surged 17%, on average."

How can the market advance so much so quickly when stocks tumble another 11% after hitting the 20% bear market threshold?

James Stack, president of InvesTech Research, says it's because bear markets tend to be "V"-shaped in their final stages. That is, share prices tend to decline dramatically and quickly as investors capitulate, then rebound just as quickly. "Once a bear market ends, the rally out of that bottom is very sharp and very, very profitable," Stack says.

Yes, we all know that averages and statistics can be misleading. After all, the returns above are for the average bear market. What's to say that this will turn out to be an average bear market, with all the bad news still out there?

What to do when the stock markets decline sharply?

http://www.wfic.org/article/page


What to do when the stock markets decline sharply?

By Claus W. Silfverberg, director, WFIC

According to one theory you should stay calm and do nothing. The stock market will eventually climb to new heights. And it is impossible for you to time your investments – the short term development of the stock market is unpredictable, most of the time the market is flat and stable, and positive and negative price developments occur so fast you are not able to react.

According to a second theory you should rebalance your portfolio and buy more stocks. Rebalancing is necessary because you have an investment strategy or an asset allocation, which you believe is just right for you. When the stock market decline the relative value of your stocks diminish and you need to buy more stocks to re-establish the right proportions.

According to a third theory – advanced by a.o. Warren Buffett - you should “be greedy when everybody else is fearful” – i.e. you should buy more stocks. When stock markets decline, investors tend to overreact, and stocks fall to prices well below their long term value.

According to a fourth theory you should have stop losses on all your shares and sell immediately when the price drops below the indicated level. Since this theory mainly applies to individual stocks and not stock markets in general, perhaps we may neglect it when considering declines on the stock market.

According to a fifths theory you should never buy stocks as long as they are falling in prices, but wait until the price fall has stopped. Then you should be an active investor.

According to a sixth theory you should sell your stocks when the short term moving average price falls below the long term moving average price, and only start buying again when the opposite occurs.


What do private investors actually do when the stock market decline?

Most of us stop trading. Most of us act according to the new trend of the stock market with a 6 months delay – both when the stock market collapse, and when a new bull market begins. Most of us overreact based on our short term experience – at one time we are too optimistic, and at another time we are too pessimistic. Some of us loose a terrible lot of money because we have committed a number of sins – we have too few stocks in our portfolio, have stocks in poor quality companies, have illiquid stocks, or have been investing based on borrowed money or money we need for daily consumption.

Conclusion

It is difficult to tell which of the theories is the right one, but looking at our normal behaviour it seems clear to me that we need to invest in a more rational manner – do our homework before choosing the companies in which we invest, base our investment on long term perspectives, base our investment on fundamentals such as p/e figures over a long period of time, base our investments on demographics and macroeconomics, learn about the stock market fundamentals, and last but not least base our investments on our individual investment profile and strategy, and not on whether the stock market goes up or down.