Eye2theLongRun

There is of course no fancy way or means whereby you can either:

1. Avoid bear markets. They are a fact of investment life; or,
2. Devise ways of beating these markets. They are capital markets.

You can however understand and thus try to manage the type and extent of your exposure to risks arising in bear markets. Understanding their broad characteristics is a rational place to start. The past helps – somewhat – with this.

Definitions

1. Bear market – a 20% drop from a recent (material) high
2. Correction – a 10% drop from a recent high.

Recovery or move to a new phase involves observing reversals in these. Two things to notice. First the numbers are arbitrary – but so are any numbers. Consistency is more important than being overly precious. Second, a bear market may be well underway prior to its being noticed.

Characteristics (based on US equities – a good enough global proxy)

1. The average bear market sees a 36% drop in prices
2. The average bull market sees a 114% gain in prices
3. Since 1928 26 bear markets in the US
4. Since 1928 27 bull markets

Thus long run equities have gained and that by a significant margin over that period, bears have ben unavoidable but so have bulls so simple “buy and hold” would have won handsomely had it been stuck to.

1. A bear market lasts an average of 280 days or 9 months
2. A bull market lasts an average of 991 days or 2.7 years.

Do these change? Of course they do. These are averages. Reality unfolds in cases.

Undershooting and Overshooting

1. half of the strongest days in the last 20 years occured during a bear market; and,
2. A third o best days in a bull market occurred in the first 2 months of that market.

It is close to impossible to “time” this sort of price behaviour.

Conclusions

1. Up beats down over the long run
2. Most action has occured before we are aware of it
3. Stay invested – you wont “pick” changes easily
4. Equities have risen 78% of the time over the last 92 years.

Over a 50 year time horizon expect 14 bear markets but expect not to know when they will occur.

For portfolio strategies to help cope see THE FINANCIAL STRATEGIES GROUP LTD FAP -FSP771591.

While the reason for each decline may differ, market pullbacks are part of the game. Based on history, in the US at least, for equities markets we can expect drawdowns of:

• Down 10% every 10-12 months;
• Down 20% roughly every four years; and
• Down 30% approximately every 10 years.

Obviously, even bigger declines can occur. Seeking more precision than this is spurious. Accepting this is prudent. Managing for it successfully is one holy grail.

Matt Levine at Bloomberg is likely one of the best analysts Wall Street has. He is shrewd, unpretentious, on the money and his written output – daily – would easily match Tyler Cowan’s reading speed. He has a great description of El Salvador’s move to adopt bitcoin as its monopoly currency. It is “millennial capture” thumbnailed into a couple of thoughts and expressed succinctly….

“[T]his is an example of market segmentation by standing in front of a PowerPoint presentation at a Bitcoin party wearing a backwards baseball cap. This is market segmentation by slapping a cool name — “Volcano Bond” — on a bond that is strictly worse than a readily available alternative. This is market segmentation by combining a normal thing with (1) crypto and (2) a huge markup, and then marketing it to crypto people who want to pay the huge markup not to buy crypto (they can just buy crypto!) but to buy into a crypto adventure.”

While there is little doubt that digital currency will expand and perhaps clear the stage of other dangerous political instruments while shutting down the “Fed Watcher” industry to all our benefit…. There are likely to be stumbles along the way. Matt’s eyes are a great means for watching this. See Matt Levine – Bloomberg

The government has shown its typically regulatory interest in the burgeoning “buy now pay later” segment of the capital market. This “I can’t see the costs so it must be free” approach to relatively high risk easy come but not so easy go credit has been growing strongly in NZ just as it has elsewhere. Various “caring Ministers” have now shown considerable warmth to the idea of “saving” any poor darlings who get lost under this new money tree – and of course the weapon of choice is the fired up and ready to go legislative battery already operated by the various save our souls agencies.

There are, baldly, two choices here:

1. Crunch all providers of any form of credit even handedly and thoroughly consistently, with the full blast of the “Ministers know what’s the best risk for you, what you can afford and what you need and I’m going to stop you and anyone trying to say otherwise from moving outside my plan for you.” The “here for you cradle to financial grave” approach to financial security – which is, incidentally, popular with providers since it tends to handily exclude the competition and lock in profit for the incumbent.

Or

2. The far less popular, “time for some adulting. You know perfectly well there are no free lunches, and you know better than anyone else what you can and cannot afford. If you choose to disregard what you know in your head and your heart you stand to play your own Squid Game and lose. It has always been this way and with no “fools paradise regulation” to pretend to help you, you have learned how to deal with this. It’s a pain yes. But it’s realistic and long run you know you are better off”.

Unsurprisingly neither providers nor politician are in favour of this second approach. It generates competition, there are no babies to be kissed, it calls for “do nothing” and providers must seriously look after their would-be borrowers.

Either choice demands absolute consistency (or its simply not equitable or “fair”), serious enforcement (not cherry picking what regulators figure they can win in court) and it needs to provide disclosed risk low cost finance to those needing credit rather than a whimsical, dream on Yeah/Nah approach to capital.