財經觀察 1214 --- How to Love the Bear Market

This is my first real bear market experience with portfolio management practice and so far stop loss rule kept me in game. For not very much experienced person like me sitting on the sideline may be not a bad idea. If you can wait a little bit longer there may big chance ahead. Enjoy the following reading....

How to Love the Bear Market

by Alexander Green, Chairman, Investment U/ Investment Director, The Oxford Club

Dear Investment U Reader,

Although we saw a furious short-term rally late last week, the market entered official bear market territory earlier this month. (A bear market is defined as a drop of 20% or more from a previous high.)

This is a good thing. Legendary investors understand this. Ordinary investors don't.

If you haven't spent much time buying stocks getting excited about a bear market doesn't just sound counter-intuitive, it sounds nuts. After all, how can you feel appreciative watching the value of your life-savings grind lower?

But try thinking like a chess player, a few moves ahead.

Every stock investor knows that you're supposed to buy low and sell high. Bull markets give you a chance to sell high. Bear markets give you a chance to buy low.

If you want to prosper during the next bull market - the one that will propel the averages to new highs in the years ahead - now is your chance to pick up some bargains.

Unfortunately, too many investors are lulled into complacency during bull markets and scared out of their wits in bear markets. So they do just the opposite, buying high and selling low.

Yes, the market has fallen sharply over the past nine months. And it may fall further in the weeks ahead.

Still, this is an enormous opportunity for long-term investors. Too bad most of them don't see it that way.

As Jason Zweig wrote in last weekend's Wall Street Journal, "The people who so far this year have yanked $39 billion out of U.S. stock funds, and $6 billion out of exchange-traded stock funds, do not understand this. But if you are still in your saving and investing years, a bear market is a gift from the financial gods - and the longer it lasts, the better off you will be. Instead of running from the bear, you should embrace him."

Dr. Jeremy Siegel, author of "Stocks for the Long Run," concurs. Last week he spoke at FreedomFest in Las Vegas, pointing out a few essential facts.

U.S. stocks are undeniably cheap, selling at just 15 times prospective earnings. That's the cheapest the stock market has been since 1991.

Take any rolling 5-year period over the last 200 years, and stocks have outperformed bonds and bills 70% of the time. Take any 10-year rolling period and stocks outperformed approximately 80% of the time.

Yet we just finished one of those odd 10-year periods when stocks have actually done considerably worse. With dividends reinvested, the S&P 500 has compounded at a scant .65% over the past decade.

History shows that when investors buy after a long period of underperformance, they are generally well rewarded. For example, in the last long bear market, 1969 to 1982, stocks returned just 5.6% annually. But that mauling set us up for an 18-year bull market where stocks compounded at 18.5% a year, enough to turn $10,000 into more than $200,000.

Bear in mind, no one when can tell you when the next bull market will begin, how long it will last, or how high the market will ultimately go.

But, as you have probably heard your entire life, the shortest route to financial freedom is to own a business. And it is safer to own a portfolio of businesses than a single one. Hence, every long-term investor needs exposure to stocks.

When do you get to buy them cheap? During a bear market.

At Berkshire Hathaway's annual meeting in May, Warren Buffett said "I would offer you a significant sum of money if you could give me the opportunity for all of my stocks to go down 50% over the next month."

Why? He knows he owns great businesses. He would like to own them even cheaper.

Legendary investor John Templeton, who died last week, often said the four most expensive words in the English language are "this time it's different." He also said the best bargains are found at the point of "maximum pessimism."

You don't get maximum pessimism during bull markets. You get them when the world looks like it's falling apart.

Times like now, for instance. Govern yourself accordingly...

Good Investing,

Alex