Chapter 1 Don’t Let the Bear Scare You
May 15th, 2008 | by Scott |With the troubled economy in the United States, investors need a game plan for dealing with the stock market. The book, Bear Market Game Plan, Strategies for Success in Choppy Markets, written in the year 2001 by Ross Jardine offers valuable insights for dealing with today’s market. In the past few months, investors have seen financial gains wiped out in the market; and with a weak dollar, a volatile housing market and increasing energy and food costs the immediate future is very uncertain.
Jardine notes that markets never go up forever, despite our wishes for bull markets to never end. This bullish bias can turn into a major weakness when the market turns to become a bear. This book lays out strategies you can use to survive as an investor in a bear market. Bear markets never last as long as bull markets, but can damage an unprepared investor both financially and emotionally.
What is a bear market? There is no set definition for a bear market. Most experts however do agree that a bear market occurs when market value drops by more than 20% over a period of time. As an example in the year 2000, the NASDAQ market at the end of the year had dropped 50% from its year high in March. The other leading markets dropped during that time period but not nearly as much as the technology based NASDAQ.
When a bear market occurs there is a rising supply of stocks with a diminishing demand for them. Sentiment among investors turns pessimistic, there’s an increase in unemployment while productivity in the marketplace drops. The cycle of bear and bull markets has been observed by economists for over 100 years so it is not a new phenomenon. The most famous bear market in the United States history was at the same time as the Great Depression. From 1929 to 1932 the Dow Jones Industrial Average lost 90 percent of its value. In 2000, the internet bubble burst as companies discovered that creating a website was not a guaranteed means of making money and investors learned that earnings reports really do matter.
For the past 50 years, the average bear market has last 9 months with a 29 percent drop in the markets. The 1973-74 bear market lasted 20 months, and on average it has taken 17 months for the markets to regain their value following a bear market.
The smart investors recognizes that there are both bear and bull markets and he must use separate strategies to be successful in both types of markets. You should not be discouraged by a bear market as there will be opportunities to make money during a downturn in the economy. Over the coming weeks, we will be taking a close look at the Bear Market Game Plan that Ross Jardine recommends for investing in a bear market.