Waiting for a Bear Market

Today I came across a interesting post by Dev Ashish at Stable Investor about why a investor (especially if he is young) should yearn for a bear market than a bull market. The logic he provides is pretty right given that the cheaper you buy a stock / index, the higher the probability that you shall make a decent return on the long run.

Then again, a bear market is a symptom of a disease rather than the disease itself. A bear market is primarily caused by a change of opinion about future growth of the economy. A good economy that is not overheated and yet growing on a consistent tick can provide way better returns than any buy you can make in a deep bear market. Don’t believe me, well check out the chart below which plots the performance of the Dow Jones Index from 1982 to 2000.

Over the period of time (18 years approximately), the Index went up 1,113% (or 11.xx times its initial value). Only once during the entire phase was a strong opportunity (Black Monday of 1987). If you started investing in 1982, you had to wait till 1987 for a bear market and if you started in 1989, your opportunity came only after the IT bubble burst.

In previous posts I have detailed about how I use multiple ways to determine whether market is bullish or bearish, but that is more from a technical perspective.

A drop of 20% (one of the ways a bear market is classified) doesn’t happen a lot of the times. In fact since 2009, we have had only three times Index has fallen by 20% or more and each time the scare is that this is just the start with worse yet to come.

But do investors really need to await for a bear market to come before investing money for the long term? Even in bull markets, you can find sectors / industries that are hitting the floor due to issues. 2008 marked the peak of the Nifty Metals has been smashed like anything. In fact, other than realty, this has been one of the worst performing Index. And yet, after each big fall, the Index has risen like a phoenix.

PSU Banks were literally written off thanks to their disclosure of high NPA’s quarter after quarter and yet in the recent months, they have given nearly 80% from bottom. Of course, none can catch the bottom and 80% is not something that could have been achieved (and the other thing it would have needed is to time the top as well). But what about 30%?

Asian Paints has been on a one way trajectory and yet if you were to check out the charts, falls of 20% or more have been all too common. Unless you believe the company has gone to dogs, does it hurt to risk a bit when stocks that are excellent have been plummeted due to one or the other issue that has taken over the media frenzy at that point of time? Or what about Apple or closer home ITC or Hindustan Unilever among hundreds of others?

Okay, you are using hindsight and selection bias to showcase companies that have survived you may claim and I plead guilty. But while companies may die, do sectors die? Nifty IT which represents the cream (and not so creamy) companies is down nearly 20% from its peak. Valuations are at multi year lows, is it worth a Buy?

While I have invested a small bit, I am waiting for confirmation of a trend reversal to plunge in more. In that way, I want the fundamental evidence I have in hand to match the technical parameters I follow. From its peak, Nifty Pharma index is down more than 20% even after considering today’s rise. Yet, given that Pharma as a Industry should continue to grow, doesn’t it make sense to risk either when it becomes too cheap (it hasn’t for now) or showing the technical evidence necessary that makes it a worthwhile sector to pick?

Do note that every opinion including mine are biased based on our circumstances and our beliefs. Anyone who isn’t holding any investment in Real estate (and that would include me) is hoping for and building a case as to why Real Estate prices should fall, but if you ask one who are invested, they can give you as logical answers as I do on why it will not fall. Either way, none of us know the future.

A bear market is useful for building stocks only if your own job is secure but deep bear markets don’t arise in a well doing economy. It arises when shit hits the fan so as to speak and when that happens, you would wish that you rather have your job back than a opportunity to buy stocks cheap. Rather than wait for a proverbial bear market, I think it makes a lot more sense to take advantage of market miss-pricing in individual stocks / sectors and hope that the long bull run continues without too many a hiccups.