Published by Kauders Portfolio Management, Authorised and regulated by the Financial Services Authority
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In a bear market, there are more sellers than buyers. As the economic pressure rises, people are forced into selling to raise cash, but most buyers stay away. Once a bear market starts, it can only end in deep despair because until investors have made very heavy losses they cannot be converted to leave equities alone. Investment advisers lose credibility and many investors are ruined. That is how the capitalist system works!
The complete bear market cycle involves losses of 75% to 90% or more (we believe this one will be more). From 1929 to 1932 those investors who held the Wall Street index and did not trade lost 89%. Between 1973 and 1975 London lost 73%. Investors who tried to trade ended in an even worse situation.
Each bear market rally gives the spurious impression of a new bull market, which in turn dies away once the ill-informed have bought. Given the huge costs of trading, it is impossible play a bear market rally without being caught out when the trend suddenly changes. As for picking stocks that rise when most go down, fine, you may pick a winner but you will certainly pick losers as well!
Just as a bull market climbs a wall of worry, so a bear market flows down a river of hope. You must decide a major bear market is in progress, because most investment advisers will be unable to recognise it until too late.
When you have decided a bear market is in progress and you want to sell, then the hardest part follows. You must resist making an emotional decision to sell based on fear. You need that bear market rally to deliver better prices! Patience is a virtue. Of course, considering future investments, if Gilt prices rise at the same time, then even patience goes unrewarded.
Sooner or later, equity markets will start a new downward drive in prices as the countertrend rally ends and the bear market resumes.
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© Kauders Portfolio Management 2001