Ottawa Investment Advisor John Bruce

How To Tell the Worst of the Bear Market is Over

May 26, 2009 · Print This Article

When it comes to the stock market, how do you determine the exact moment when the worst is over and thing are about to turn around? Should you buy stocks now or should you wait? The truth is that there is no crystal ball to predict the future, but there are plenty of warning bells to let us know what is going on the market, depending of course on your risk tolerance.

If you are one of those people who needs to know that their capital is “safe” and will absolutely not decline in value for any period of time, don’t buy stocks.

Buying stocks is basically like participating in a business venture, with its possible rewards and certain risks. You become a stakeholder in both the enterprise and the economy. By buying a public company, you get liquidity – the ability to buy or sell on any day the market is open, something not available to you when you buy shares in a private company. You can sell your share upon reading of impending gloom for a certain company in your morning newspaper, and buy back your position after lunch when you realize how under priced those shares really are and how you totally over reacted. (This is obviously not the best investment technique, by the way.)

The public markets will indeed give you the gift of liquidity, allowing you to buy or sell companies most any time. However, it is subject to react to any event or announcement and prices can suffer. By association, even if the company is doing great, the price of the shares may reflect the negativity of the whole market. Every shareholder, just as any business owner, has to accept the fact that if they were at any point forced to sell because of any outside circumstances, they might not like the price.

This is what you need to remember: Stock market do not react to news, they anticipate it. By the time you read or hear about something, the market has already moved. Conservatives investors will continue to wait for those news and wait for signs of recovery before jumping on the band wagon. Aggressive long-term investors will invest while the market is low and be ready to benefit from the stock rally.

So, if you are waiting for a sign indicating the bottom of the market, you might only recognize that sign in hindsight. Should you buy now or should you wait? Just remember that history has a tendency to repeat itself and although there are no guarantees for the future, you can learn a lot from previous cycle of bear market investments….. they will become bull markets again in the long run.

  • In 2008, the S&P 500 index of large company U.S. stocks fell by 38.5 percent. In the last 183 years of S&P 500 history (including predecessor indices), only the Great Depression years of 1931 (-41.1 percent) and 1937 (-38.6 percent) were worse.
  • That 183 year history contained a lot of calamity including, oh, the American Civil War, World War I, the Spanish Flu Pandemic, the Crash of 1929, the Great Depression, World War II and the Holocaust, Stalin, Mao, the assassination of JFK, Vietnam, the 1973 Oil Crisis, the Crash of 1987… just to remember a few of many things we somehow survived, but which sowed much fear into the headlines – and the hearts – of the day.
  • Over the ten years ending December 31st, 2008, the average annual return for the S&P 500, the world’s largest stock market in the world’s largest and most innovative economy was negative 1.38 percent (U.S. dollars). On average, you’d have done slightly better sticking money in a paper bag, and lighting the occasional bill on fire. That’s a horrifying statistic.

However, that was an historically very rare 10-year time period, created by the coincidence that its beginning was in a very bullish, optimistic market (January 1st, 1999 was near the peak of the Technology Bubble), and its end was after the third-worst year in 183 years.

John S. Bruce
Investment Advisor
Mackie Research Capital
Direct Line- 613-425-3732
Toll Free- 866-860-4190

The opinions, estimates and projections contained herein are those of the author as of the date hereof and are subject to change without notice and may not reflect those of Mackie Research Capital Corporation (“MRCC”). The information and opinions contained herein have been compiled and derived from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. Neither the author nor MRCC accepts liability whatsoever for any loss arising from any use of this report or its contents. Information may be available to MRCC which is not reflected herein. This report is not to be construed as an offer to sell or a solicitation for an offer to buy any securities. Member-Canadian Investor Protection Fund / member-fonds canadien de protection des épargnants.

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