Investing strategies and secular bear markets

[Lizard]

Thanks Hoop. Interesting post.

Being an indecisive type, I just tend to go for the soft option and some hefty re-balancing whenever things get a little murky.

It is interesting how badly the NZX appears to be responding to US problems. Though reality is that earnings were generally being capped by the high forex rates and looking around it is hard to spot likely candidates for double digit increases in eps this year. However, post year-end and somewhere around June-September the market will roll-over to focussing on the next financial year and, fingers crossed, there will be some clearer opportunities for growth emerging.

[Hoop]

Liz,
The NZX50 has reached that mid3700 support you mentioned...wonder if it respects it?

Yes hopefully by the mid-year, a clearer picture on how the NZ stocks are weathering this US downturn....and maybe some bargains may emerge


Another article from marketwatch.com


PAUL B. FARRELL
14 winning strategies for a bear-market recession
Commentary: Sell stocks, realty, commodities, and buy bonds, dollar

By Paul B. Farrell, MarketWatch
Last update: 8:58 p.m. EST Jan. 14, 2008
Print E-mail RSS Disable Live Quotes






ARROYO GRANDE, Calif. (MarketWatch) -- O.K., so you're a perma-bull, a perennial optimist convinced there's always a bull market somewhere. Plus, you've got the time and the smarts to find that bull.


Warning: Stop reading now. You're going to hate what we say today. You'll hear the word "sell" a lot. Why? Because if you don't sell, a lot of you smarties will lose big bucks. Remember: In spite of all the optimistic cheering during the 30-month long 2000-2002 recession, the S&P 500 dropped 43% and investors lost $8 trillion in market cap.
But I know how much optimists hate talk of recessions and bears. That's for losers, right? Even when there's a vast consensus forming among economists, Fed watchers and Wall Street insiders. So why the denial? Because you've got a big secret: As Jack Nicholson said in "A Few Good Men," "you can't handle the truth." Behavioral finance experts have a fancy term to describe what happens: Cognitive dissonance. Focus on funds, ETFs
MarketWatch offers complete coverage of mutual funds and exchange-traded funds. Highlights:

• How to outsmart a bear market
• Let winning sectors ride
• Rest easy with this portfolio
• Don't put your savings on the line
• Ten investments for 2008 Get our free Mutual Funds weekly

"People tend to ignore, reject or minimize any information that conflicts with their positive self-image," their preconceived ideas and their ideological convictions, says John Nofsinger, Washington State professor of behavioral finance, in "Investment Madness."
"The avoidance of cognitive dissonance can affect the decision-making processes in two ways. First, you can fail to make important decisions because it's too uncomfortable to contemplate the situation," Nofsinger says.
People hate conflicting data so much they get nervous when their preconceptions are threatened. Their brain freezes, they self-sabotage and do nothing--and their worst fears become a self-fulfilling prophecy.
The second way we handle conflicting information: "Your brain will filter out or reduce negative information and fixate on positive information," Nofsinger says. Unfortunately, "if you ignore negative information, how are you going to realize that an adjustment in your portfolio is necessary?" Plus, you miss lots of opportunities.
Your brain is an unreliable computer
The problem is your brain. It insists you're acting rational, even when you're making decisions based on totally irrational beliefs about money, budgeting, savings and investing. No wonder Nofsinger titled his book "Investment Madness."
Even with all our hi-tech online tools, data and programs, the optimist's brain still screws it up.
"Think of the human brain as a personal computer with a very slow processor and a memory system that is small and unreliable," says another behavioral finance guru, University of Chicago Professor Richard Thaler, in "The Winner's Curse."
"I don't know about you, but the PC I carry between my ears has more disk failures than I care to think about," he says.
Thaler warns that the "rational investor" theory is an outdated fantasy. Quoting Nobel Economist Milton Friedman: "Even though people can't make the calculations in the economic model, they act as if they could make the calculations."
Robert Shiller calls it "irrational exuberance, wishful thinking on the part of investors that blinds us to the truth of our situation." We convince ourselves we're rational, yet keep making irrational decisions. Thaler warns: "If you are prepared to do something repeatedly stupid, there are many professionals happy to take your money."
Our ego is trapped in cognitive dissonance, denying the new bear/recession, one that economists say could last until 2010 or 2011, longer than the 2000-2002 meltdown that dropped the Dow 4,436 points, from 11,722 to 7,286.
14 action strategies for stock jocks
So what's the solution? The best way to protect your portfolio, retirement nest egg and your family's assets? Last week we covered No. 14 for passive investors, the " Lazy Portfolios" which are beating the S&P 500 by wide margins. See previous column.
Today we'll review the 2008 forecasts from one of America's leading economists, Gary Shilling, Forbes columnist and editor of "Insight," a financial newsletter. Shilling is a contrarian who's been telling it like it is for 45 years. Back in 2004, Shilling predicted: that "subprime loans are probably the greatest financial problem facing the nation in the years ahead." Greenspan, Bernanke, Paulson and Wall Street's greedy, delusional CEOs totally missed that warning until it exploded in their faces last summer.
Every January, Shilling forecasts the upcoming year's major themes. In his latest newsletter he focuses on thirteen recommendations for stock investors facing a long bear/recession. The first five are directly linked to the subprime mortgage meltdown:

1. "Sell or sell short homebuilder stocks and bonds.
2. "If you plan to sell your home, second home or investment houses anytime soon, do so yesterday.
3. "Sell short subprime mortgages.
4. "Sell or sell short housing-related stocks.
5. "Sell or sell short consumer discretionary spending companies."
   
   Like I said, you'll hear the word "sell" a lot. You'll hate it, get angry, and dismiss his advice. Why? Optimists can't handle conflicting data. Remember, as Thaler warns, if you "do something repeatedly stupid there are many professionals happy to take your money." Consider the $8 trillion in losses between 2000 and 2002.
   The next five recommendations focus on the out-of-control speculation triggered by years of easy money. "Oceans of liquidity are evaporating into small puddles and the zeal for high yield is being replaced by worries over solvency," Shilling says.
   "Leaping volatility in many markets is telling investors, painfully, just how far out the risk spectrum they had climbed. So the de-leveraging of the many areas of intense speculation beyond housing is at hand."
   His next five strategies counter-attack this rampant speculation:
   1. "Sell low-grade fixed-income securities." Junk is junk, so dump!
   2. "Sell or avoid most commercial real estate." During the 1974-1979 recession, I was at Morgan Stanley helping REITs, banks and developers work-out huge problem portfolios. Today smells worse.
   3. "Short commodities: Long run, we're bullish," Shilling says. But short-run "as global demand falters with a global recession, commodity prices will fall."
   4. "Sell or sell short emerging market equities." If you think foreign stocks will do better than domestic, think again. "Major stock markets tend to move together, particularly on the downside." Plus, China's P/E ratios exceed 50.
   5. "Sell emerging country bonds."
   Also, don't count on Fed cuts rescuing Wall Street. They'll ease the collapse for a few minutes, and then reality sets in again. The recession must run its course. So here are Shilling's final three strategies as he looks deep into America's soul at the rough days ahead:
   
   1. "Sell or sell short U.S. stocks in general.
   2. "Buy long Treasury bonds." They will "rally as the recession unfolds."
   3. "Buy the dollar before long," Shilling says. "The buck has been weak recently because the U.S. is the first major economy to slip into recession, the Fed is the first central bank to cut rates, and the U.S. housing bubble is the first to break, all of which make America a relatively unattractive place for investment. ... The recession that we believe is now starting in the U.S. will spread globally in about six months as U.S. imports weaken and the global credit crunch curbs financial activity worldwide. Then the dollar will probably rally as it plays its usual role as a safe haven. Since markets anticipate events, the turn in the buck could be close at hand."
   Ride it out?
   Should you sell or "ride it out?" Shilling asks rhetorically. "Many investors believe they're better off staying with their stocks, even in the face of a major bear market, because timing the market is difficult. That's fine if they stick to their plans, but far too many panic at market bottoms and sell at just the wrong time."
   Finally, if your brain is still screaming, "Don't listen! Don't sell!" remember Shilling's formula: "Another reason for selling stocks in anticipation of a bear market is a matter of simple grade-school arithmetic. If you lose 50% on a position, you have to double your money to get even."
   Get it? Lose 50% during a bear, you have to make 100% to recover your losses in the next bull. In short, "sitting on the sidelines" may be your best strategy in a bear market. But first, you really have to hear the word, "Sell, SELL!"
   
   

[Halebop]

Nice article Hoop.

I think we are a little early to call this a bear market just yet (even though I too think it is). At the moment it's just a scary looking correction.

Reading the article reminded me just how much potential trouble CNP is facing. US Property markets are evil and lonely places during recessions. I was a little bemused to see Sotheby's picked this moment to buy back their building for twice their (quite recent) exit price. Based on their corporate track record, expect an art market recession to start some time this afternoon. Citicorp is also confirming my belief that they are a fair weather friend only. They seem to have an unseemly habit of getting a cold every time someone sneezes.

[Deev8]

PAUL B. FARRELL
14 winning strategies for a bear-market recession
Commentary: Sell stocks, realty, commodities, and buy bonds, dollar

That was an interesting article by Farrell. David Dreman expressed almost the opposite point of view in one of his regular his Forbes Magazine articles last October http://www.forbes.com/personalfinanc.../1015/106.html (free access but registration is required).

The article title "Panic No. 12" referred to the twelve major market sell-offs since the end of World War II. Dreman says:

Since coming to Wall Street in the late 1960s, I have been through seven such crises. Somehow, the market survived them and thrived. Look back even further to the period following the end of World War II, and sure enough, you'll find that pattern holding in four more market spills. Beginning with the first postwar panic, resulting from the 1948--49 Berlin blockade, stocks have tumbled only to come roaring back to new highs. The worst market break came in 1973--74, during a nasty recession and the Arab oil embargo. The most recent was the dot-com slide, which began in March 2000 and ended in late 2002. The Nasdaq Composite, heavy with tech names, still has not regained the ground lost in that crash, but the broad indexes have.

During each crisis investors felt confused, uncertain and panicky. They believed nothing in their previous experience could help them cope with the ominous new world they faced. "Sell, sell, sell," their inner worrywarts advised. "Save your capital before it's too late."

This almost always turned out to be a bad move. Selling in a crisis is foolish. Yes, if you had sold the S&P 500, say, a year into the bear market, in March 2001, you would have avoided another 28% decline before it hit bottom. But would you have had the wisdom to get back into stocks a year and a half later? I don't know of anyone advising an exit in March 2001 who also switched to a bullish stance in fall 2002. And if you had sold in March 2001, and stayed out, you would have missed an opportunity. Since then the stock market has returned 46% (including dividends). On average, for each of the dozen crises, the market was up 36% one year after the low point, 44% after two years.

Today's stock market remains solid with good fundamentals and many cheap stocks at hand. The ongoing liquidity crisis must be handled gingerly, of course. Commit your capital slowly as several more shocks must be absorbed before a broad market rally begins.

[Halebop]

Today's stock market remains solid with good fundamentals and many cheap stocks at hand. The ongoing liquidity crisis must be handled gingerly, of course. Commit your capital slowly as several more shocks must be absorbed before a broad market rally begins. [/I]

So stay in the market but do it slowly because he's certain there are more drops to come? Well one way or the other he'll be proved right huh?

[Hoop]

Deev It seems David Dremans strategies have touch of Buffet. Buffet sorts out stocks that will survive a downturn... have super-long uptrend lines that are always respected and then averages down in when the price drops to the point that they are classed as bargains. There seems to be many different stategies...I guess you have to find the one that works the best for you........
Interesting points of view from the opposite spectrums.

[Deev8]

Deev It seems David Dremans strategies have touch of Buffet.

Similarities aren't surprising I suppose. They were both students of Ben Graham at Columbia University, although Dreman's approach is closer to Graham's concentrating more on quantitative analysis while Buffet places more emphasis on the quality of management and identification of companies with "defensive moats" etc

[Deev8]

So stay in the market but do it slowly because he's certain there are more drops to come? Well one way or the other he'll be proved right huh?

His advice was a little less ambiguous than that - Don't feel forced to sell stocks that you are holding in a panic. Also be aware that the panic is creating some good opportunities, but commit new capital to these opportunities gradually as prices may fall further before they rise (creating more bargains).

[winner69]

Wasn't that long when 1500 was support for the S&P500 ..... after todays nearly 3% fall 1300 is in danger .... now 15% of the highs of last October

Things sure change eh

[winner69]

The first post I made on this thread mentioned 'secular bear markets' and that the US markets have been in one since 2000. Secular bear markets on the average have lasted for 13-14 years. Long term real returns over a secular bear market are essentially zilch ... even thought there are periods when the market can go up by more than 20% or more in any one year

The DOW today is 5.8% higher than it was in Dec 1999 / the S&P500 (a broader measure) is 9% lower than it was in Dec 1999

See what I mean about secular bear markets ..... if my hypotheseis is true and we are in the middle of a secular bear market the markets in the US (at least) in 2013 / 2014 will still be about where they are today

Hence my investing strategy remains unchanged ...... pick winners and stay with them as long as they trending up .... and even in secular (as well as ordinary) bear markets there are winners ... not everything goes down