Great Bear Markets

"You make most of your money in a bear market, you just don't realize it at the time."

Shelby Cullom Davis, investment banker and investor.

When I first read this quote, the concept that Shelby was driving at immediately grabbed me.  Bear markets inevitably lead to investors losing faith with the stock market.  As values stagnate prices become better value, providing that earnings are increasing.

As a long term investor, providing that we have a cash to put to work, the ability to but good quality stock cheaply should be a source of joy.  However investors in the stock market (just like homeowners) prefer prices to go up after they have bought as this confirms that they made a good decision in buying. 

It should be obvious to us that the less we pay initially, the more we will make in the end - buy low, sell high and all that.

It was while reading Richard Beddard's posts on iii that I came across this article by Peter Comley (extract shown below):

Source:  http://blog.iii.co.uk/guest-post-why-ill-buy-40-random-stocks-when-the-ftse-hits-4000/

So we are 12 years into a bear market which may last between 13 and 16 years if history is anything to go by.  We could argue about when the current cycle began and did a new bull market start in 2009 but I think that misses the point.  If we are investors (as opposed to traders) then we should act consistently and seek out quality stocks regardless of what the market is doing.  If the market goes down and target stocks decrease to a desired level then we should buy.

Investing is difficult psychologically because our money is on the line.  As Warren Buffet says Mr Market is temperamental, but we can use that to our advantage to buy in at better prices.  We don't know what's going to happen tomorrow or the next day/week/month/year.

Having said all of that, we need to ensure that we only invest in quality stocks that can survive the turmoil that created the bear market - in the current case excessive leverage during the boom times and the banks now restricting lending in order to boost their capital ratios.  I have deliberately chosen stocks for ValuableGrowth that are highly cash generative with low levels of debt.  These companies do not have to sing to the tune of dysfunctional banks and are free thrive even under a harsh economic environment.

It's early days for the ValuableGrowth portfolio but I still firmly believe that this approach to investing will pay off in the long term.  As investors we need to have the cash to put to work during the bear market but also the confidence in our approach to continue to buy despite the falls.