Key Lessons from Past Bear Markets

Published on January 5, 2009

Key Lessons from Past Bear Markets

January 5, 2009

Bear Markets are tough and 2008 witnessed one of the grueling bear markets in the stock market history. Whether or not 2009 represents another bear market or a new bull market is open for interpretation. I have already mentioned my thoughts on a bubble that is forming in treasuries and since that post, though short time, the Yields on 30 years bond has increased approximately 10%. Only time will test it and I shall keep updating about that.

As I was going through some of the lessons of the past bear markets, I came across one of the interesting one from Lowry’s which were in almost full agreement with my own thoughts. I think these are some iof the valuable lessons. Though Lowry offers a good service, please make sure you are signing-up for the right reasons as it Costs nearly US$1,200/p.a.

According to them- “One of the good things about living through a bear market is that it offers the opportunity to learn some very important lessons that will allow investors to survive and prosper through all the bear markets in their futures.  Here’s just a brief list of some of those important lessons to be learned:

  • Bear markets are not just something to be endured.  Properly equipped equity portfolio managers have a unique chance to achieve performance records dramatically out-performing their Value and buy-and-hold competitors, to such an extent that their competitors will probably never be able to catch up.  
  • Specific news events are typically completely different from one bear market to another.  Therefore, attempting to use news events to manage portfolios in a bear market is likely to be unsuccessful. 
  • Bear markets typically begin with a high degree of selectivity, and subsequently broaden and intensify as investor psychology turns progressively more negative.  Accordingly, it is far more important to be in heavily defensive positions during the last half of a bear market than during the first half.
  • Value investing simply does not work in a bear market.  Averaging down compounds the original error.  It just does not pay to fight the primary trend of the market.
  • There is absolutely no practical way (other than pure guesses) to determine in advance just how deep a bear market will fall or just how long it will persist.
  • The only thing that remains consistent throughout all bear markets is the Law of Supply and Demand.  As long as Supply exceeds Demand, prices will fall.  When Demand begins to exceed Supply on a trend basis, prices will rise. “

Courtesy Lowrys.

While I agree in general with their broad conclusion of supply/demand economics, I don’t quite agree with Value investing part. Value investing generally is not so much dependent on time, instead it depends on “value”.  But broadly market will also not recognice the real value unless demand surfaces for those scrips.

I thought these were very crisp conclusions and hopefully you benefit from either Lowry’s research or from the thoughts above.

What are your lessons from past Bear Markets? Do you agree with Lowry’s?

Profitable Trading, OP

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