I have not yet seen the movie “The Revenant” for, which Leonardo DiCaprio won the Oscar for Best Actor, but I have been told the scene when the bear attacks him is excruciating to watch and goes on forever and ever.   

Most investors will be familiar with term bull and bear in the context of investing.  Bull market refers to a rising market with share prices generally going up and a bear market refers to a falling market with shares prices generally going down.   Investors with a positive view on markets are called bulls and those with a negative view are known as bears.

Much like the movie it has been excruciating to watch share prices collapse over the last 6 months particularly since the start of the year with January recording one of the worst ever starts to a new year for global financial markets.    I have fortunately never experienced a mauling by a bear, but I can tell you watching your money evaporate, seemingly on a whim, is really painful in its own way even for the toughest of investors.   This is why investing may be considered simple, but never easy. 

Bull and bear markets are quite normal as part of a full investment cycle and should always be measured from peak to peak or trough to trough.    Unfortunately investors seem to have very short memories only ever able to recall the previous up or down cycle, which they then extrapolate into the future, either expecting markets to keep going up or keep going down based on the recent past. 

Of-course this is where the opportunities are for the astute investors to exploit the bad emotive behaviour of the herd, but this is not easy considering our instinctive behavioural herding bias.   Investors are fairly acceptable to making losses when everyone else is also losing, but heaven forbid losing money when others are making money.  

This is why it is so difficult to be a value investor, notwithstanding the conclusive evidence that value investing out-performs a growth / momentum strategy measured through a full investment cycle.  As a value investor you are usually buying what others are selling or selling what others are buying, often referred to as contrarian investing. 

What makes this so difficult is ignoring the story behind the trade, if you didn’t own resources in 2006 you were considered a fool, “because any fool can see the super-cycle in commodities will continue forever feeding China’s insatiable demand” or in 1999 when the TMT bubble produced overnight dotcom millionaires; “if you don’t own the latest silicon valley start-up you don’t understand technology and the fact that technology is the future”.  Needless to say both these trades ended in tears with many investors losing a lot more than their shirts.

Stand back from the “story” apply some common sense and then decide what to buy and what to sell.    When the bear comes, and the bear always comes, your only saving will be the price you paid!

 

Mark Williams
Mcomm, CFP®, HdipTax
T. 021-851 3746
Email. service@synfin.co.za

 

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Bulls and Bears in the money game
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