Bear markets happen, they are unavoidable. Every three to five years mainstream stock markets plummet by 30% or more. The reason is simple – human optimism and pessimism always overshoot.
I like Howard Marks’ pendulum analogy. Thanks to an absence of perfect, permanent solutions we swing back and forth between extreme optimism and pessimism, spending only a brief time at the happy medium.
Each bear market has proven to be an incredible opportunity to become the owner of high-quality companies at bargain prices. Yet each bear market has been met with existential terror by both private and professional investors, egged on by rabid financial journalism.
In my professional life I have experienced, and survived, three of the largest bear markets yet known – the dotcom bust, the financial crisis and the covid crash.
The triggers were different each time and their profiles too, but all three had the same common denominator – humans.
Stock markets cannot crash if humans do not sell assets at a faster rate than they buy them. The madness of crowds drives prices down, and down, and down.
And then they recover. Every time, they recover and go on to hit new heights. Smart people know they always recover, it is just a matter of time. Smart people lock in massive future returns when the spaghetti hits the fan.
In my regulated investment company, our clients survived and thrived the covid crash.
Compared to an investor who ran screaming from the stock market as prices plunged and then stayed out of the market the following two years waiting for things “to calm down”, they are 40-50% better off.
That is, rather than having investments totalling £5m, today theirs are worth somewhere north of £7m.
At any point of crisis great opportunities present themselves for future, life changing returns. Having and sticking to a predetermined, coherent investment strategy is how to capture them.