What Will You Learn From This Bear Market

[Arby]

Hopefully this Bear market will teach me some lessons for the future. A few lessons I've learned so far:

1. My risk tolerance is not as high as I thought it was. I was mentally prepared for a 30% market drop every 5 years or so. I knew there had been larger market declines in the past, but I convinced myself that a 50% decline couldn't happen again. I haven't panicked (yet), I don't intend to all sell my stocks, and I'm not losing sleep (yet), but I'm feeling very concerned about the large losses in my portfolio (down around 25% so far). I'll be reducing my equity allocation by 10% in the future. Mr. Market has already helped me reach that goal.

2. I need to faithfully rebalance my portfolio, at least once a year. My Investment Policy Statement defined my proposed asset allocations, but I was lax in rebalancing as the market kept rising from 2003 to 2007. I rationalized that I could afford to take more risk, and I increased my equity allocation rather than rebalancing.

[investor99]

I'll probably feel better answering this years from now.

But so far:
1. Capitalism without regulation can hurt
2. Stocks can fall fast and far
3. Asset allocation is important

[parvus]

I'm not that bothered: I've lost one year's salary (of course, it took three years to build the positions). As long as I keep my job, I will keep DCAing (and I'll spend the weekend figuring out tax-loss plays). So long as I do have a salary, I don't see the point in nominal bonds @~3.5%; that's roughly in line with what I get in salary increases and/or bonuses. But I also expect to keep working for another 20 years, have no debt, and so on.

I mention this because salary and savings and debt and investments are all part of my risk equation.

The best I can say is I'm surprised at about how quickly the turtle rolled over — really just the past two months — but I do have access to savings, open accounts, potential capital losses &c., to fund about two year's living expenses before I would have to start melting down the RRSP.

If that doesn't work, I may end up selling apples — or a blogspot.

[worthy]

To repeat what I've written before: to exit the equity markets once and for all and stick to the businesses that made me the money to lose in the market in the first place, time after time. (I'm down 25% in the last four days alone.) Government bond yields may be boring, but that beats gone.

As a senior with small children ("Daddy, dye your hair! Everybody thinks you're my granddad!") I'm only hoping there's enough time to recoup before my timeclock is stamped "Overdue: Return to Sender."

[Clock Watcher]

As a senior with small children ("Daddy, dye your hair! Everybody thinks you're my granddad!") I'm only hoping there's enough time to recoup before my timeclock is stamped "Overdue: Return to Sender."

Worthy, good for you. I am in my early 50s and I intend to have kid(s).

[lystgl]

I'm maybe too old to learn though others, seemingly, aren't. I watched, I think it was on CNBC, a blurb about the Democrats, as part of their new improved stimulus package, setting up monies for retraining. Whatever happens with GM, Ford, Chrysler, even best scenario, the industry is going to decline even further and more permanent layoffs are going to result. The really funny thing about it was they were also talking about retraining people that have lost or are losing their jobs in the financial industry. As many of these wunderkind already have MBA's, I wondered just what kind of job retraining they had in mind? Fork lift operator, truck driver, Mexican dragline, fry machine at McDonalds? Then again, maybe it wasn't as funny and inane as I initially thought?

[lilbit]

Arby, thanks very much for starting this thread. I was thinking about asking that very question a few days ago - "What have we learned from this experience?"
My answers: AATP - Always, Always, Take Profits
Pay attention to the Businesss Cycle
Credit contractions hurt everything

And: In Bear Markets, sell the rallies - in Bull Markets, buy the dips.

I actually could have made a fair amount of money had I sold the rallies.

[Inquisitive]

That the seemingly wildest pessimists are sometimes right.

Not to get caught up in the macho side of investing. People who were totally in Fixed income/cash are "unsophisticated investors" (Ok, they probably are. Lucky things.)and those in equities who want to sell may fear they will appear to be "panicking",with all the overtones of cowardice. So they don't. Sometimes maybe they should.

That by some ruthless rule of the universe, completely unrelated bad things can happen at the same time: disability, divorce, job loss, house prices, the market.They don't all have to happen to you but if they happen to people who depend on you the outcome is the same. Some of your safety margin disappears if illness or corporate downsizing/bankruptcy forces you out of employment, or if divorce forces a house sale in a down market and a pension split in the middle of a market shakedown.

Lesson? hmm. Don't trust the universe to unfold as it should, I guess.

Inq

[rhenderson]

I was ready for a 20-30 % correction in the equity portion of my portfolio but certainly not a 50% drop and still counting. I was approx. 32% in equities so that translates into a 16% drop in the portfolio, even the preferreds didn't hold up very well.

I don't fault myself because I had a model and will stick with it. I still believe that holding 100% cash could be very dangerous because of all the paper that they are printing a la Zimbabwe. I have an equal balance of financials, utilities and energy so when the markets return, so should they. If they all remain in the dumpster for the next 10 years, then we will probably be in a period of deflation in which case the fixed income portion should keep me above water, hopefully.

I'm too deep into this mess to start selling now, but may lighten up a bit if and when the market turns but will still never put 100% in cash, even after this nightmare.

[Lado]

Market timing works!

[George$]

Warren Buffett was right again when he advised: "Don't buy stocks if you can't handle a 50% drop in the market value." (or words to that effect).

[kcowan]

I have to admit that I was never prepared for this. I adopted a strategy to minimize expenses as the one thing we could control. That is proving fortuitous because things in Mexico are really inexpensive if you know where to look (you will never find it as a tourist).

We also stayed in a lot of cash because we could not find enough value investments. But the destruction of our equity portfolio along with our bond market values has got us shaking our heads and saying: Holy crap! How bad can it be!

I must say that I am impressed with just how much impact Dubya has had. I truly believe he has made history like no other President before him. And I am confident that he and his buddies have made this happen. I would never have believed that one man could have such an impact.

[biker]

Investing for the long term means more than 10 years.

[worthy]

Oh, give credit where credit is due: to Alan Greenspan.

[brad911]

- The market is rational, investors are not
- During a bull market the price of an equity is what investors are willing to pay for a stock
- During a bear market the price of an equity is what investors are looking to sell their stock for
- For a young, long-term investor patience and lack of emotion mean a lot. I have friends who look at me blankly when I tell them I continue to buy in this environment despite losses and sentiment.
- Confidence is key, but arrogance gets your portfolio wiped out. Understand the business model and internal/external risks a company is exposed to

[Studebaker Hawk]

Market timing works!

Until it doesn't.

I predict that you'll hit a rough spot and that will lead to 1) somewhat less gloating or perhaps an outright disappearance and 2) a number of members sticking it to you.



2 year's worth of results is a bit thin to get excited about.

- The market is rational, investors are not

Uhh, I thought investors were the market. How do you know that this market isn't behaving rationally???????????

[brad911]

Uhh, I thought investors were the market. How do you know that this market isn't behaving rationally???????????

Investors are never rational at the very top or at the very bottom of the market. They're motivated by greed ($200 oil) and fear ($40 oil). Just as prices weren't sustainable at the top, prices now aren't sustainable either.

Despite the difficult credit environment I expect soon that we see companies with strong balance sheets picking off their competitors for pennies on the dollar. The law of the jungle still rules here and fundamentals will outweight valuations over the long-term

[Studebaker Hawk]

Investors are never rational at the very top or at the very bottom of the market. They're motivated by greed ($200 oil) and fear ($40 oil). Just as prices weren't sustainable at the top, prices now aren't sustainable either.

Why are you so sure that prices now are not near where they should be?

All of the acquisitions done over the past 25 years were done in a bull market which saw expanding multiples. What if the more recent ones were done at too high a price? For example, what if Manulife paid too much for Hancock and Great-West/Power Financial paid too much for Putnam? Why do you think that growth must return to what it was during the past 25 years? How much of the growth of the past 25 years is real growth and not financially manufactured growth. Be careful that you don't get caught in a mantra loop that blinds you to other possibilities. Remember that mantras got us into this mess.

[desk4811]

The current crash isn't much different from the tech crash in 2000. The main lesson to be learned is to not chase any segment because it's a 'sure thing', like oil and tech was. On the bright side, this crash has occurred in the span of only about 3 months, so 6 months from now things could be a lot better, which isn't that long to wait. Also this crash shows that capitalism is self-correcting, which means that it is strengthening the markets, not weakening them - in the long run.

[Icarus]

Be careful that you don't get caught in a mantra loop that blinds you to other possibilities. Remember that mantras got us into this mess.

I'm curious what your investing strategy is. You don't seem to like fundamental analysis or market timing. Without long-term economic growth (I read your comment above to suggest that for all we know long-term growth will be stagnant), passive investing doesn't seem so hot, either. So how do you invest?

[Studebaker Hawk]

Be careful that you don't get caught in a mantra loop that blinds you to other possibilities. Remember that mantras got us into this mess.

I'm curious what your investing strategy is. You don't seem to like fundamental analysis or market timing. Without long-term economic growth (I read your comment above to suggest that for all we know long-term growth will be stagnant), passive investing doesn't seem so hot, either. So how do you invest?

I never said specifically that I don't like fundamental analysis or market timing. But I do believe mantras can blind you. Why should Canadian banks grow at anything more than the GDP growth rate in Canada? After all, they are a reasonable mirror of consumers and corporations.

When you look at Ibbotson's decomposition of market returns from 1926 through 2000, growth in earnings is 1.75%. Guess what? GDP growth is 2.04%. What if market growth starts to more closely match GDP growth? We're seeing multiple contraction going on. What if multiple expansion doesn't recur or, if it does, at a much more realistic rate? People are still seeing the world of the last 25 years in their rearview mirrors as they look forward.

How do I invest? 70% short term bonds and 30% large cap.

[Marky]

I do believe mantras can blind you.

Agreed.

[mudLark]

People are still seeing the world of the last 25 years in their rearview mirrors as they look forward.

Thanks SH ... for providing an answer, to the topic question, I can agree with.

[brad911]

Why are you so sure that prices now are not near where they should be?

Prices are exactly where they are right now because of fear, turmoil & current investor sentiment. But I don't confuse that with what the long-term valuations of companies I own will be 10 years from now. I don't expect the next 25 years to be what they were the past 25, but the market is pricing in zero growth over a forward five year basis.

I'm confident that the companies I hold can continue to grow even if EPS is depressed due to market forces. I don't look at just EPS growth when I conduct an analysis, in fact I rarely consider it. I'm not paying a certain price for my perception of what earnings will be, but rather how the company does in growing its own balance sheet, productivity and internal resources.

All of the acquisitions done over the past 25 years were done in a bull market which saw expanding multiples. What if the more recent ones were done at too high a price?

If you feel MFC or GWO/PWF paid too much for what the then market priced an acquisition at then simply don't own those companies. Likewise if you felt TD's acquisition of Commerce was at the top of the market and they should have envisioned everything that has unfolded then don't hold them either.

Companies do the best they can with the information and market that present themselves. What you always want to avoid are the classic mistakes that go against the long-term objectives of the company. Acts of omission I believe are of a much greater detriment to a company than making a mistake based on what valuation/premium you paid for a business that over the long-term grows the company's operations and/or profitability.

[lystgl]

But the destruction of our equity portfolio along with our bond market values has got us shaking our heads and saying: Holy crap! How bad can it be!

Bond market values have really tanked however I don't even count those paper losses. Don't know whether that's a good strategy or not but it helps keep me from totally going off the deep end mentally. All the bonds /debentures we purchased, we did so with the full intention of seeing them through to maturity, should we live that long, so my only concern is bankruptcy and default or vice versa.