Great Titchfield Street, London -- I rather like bear markets. If you're a long-term investor, how can you not? When you are buying shares, wouldn't you rather they were cheap than expensive, so that the potential gains were greater? Many people seem obsessed with making a quick buck in the next few months or even next few weeks. If a share isn't moving up now, "why buy it?" they cry. To me, it doesn't matter when a share goes up, only that the chances of it rising are good over the next few years or so. Patience is a virtue when it comes to investing. If only I could apply it elsewhere, too!
There is another useful aspect about bear markets. They can help you highlight great shares for the long-term. When shares are rising rapidly in a bull market, any old cruddy business will see its share price rocket, especially if it happens to be connected to what is perceived to be a growth industry. Often, a rising share price is assumed to be synonymous with a good business. Over the long-term, this can be true. Over the short-term, it makes little difference.
But bear markets are the complete opposite. Not only do the share prices of better companies decline less than the crud, the qualities of the business also shine through when economic conditions get hairy. And we have Chewbacca-like hairiness in many industries at the moment.
Take the IT group Logica (LSE: LOG), a long-term fave of mine, although I've always shied away from its high price to earnings rating. Even though Logica's shares declined (in fact, by 16% at the time of writing) this morning after the company issued a trading update, the quality of this business is readily apparent. It has still managed significant revenue growth and has increased profits margins as well. Compare this performance to competitors like CMG (LSE: CMG) and Sema, before it got swallowed up. Even larger European firms like Cap Gemini are struggling. Is the IT business attractive in the long-term, despite its short-term difficulties? Would you expect it to grow at a greater rate than the rest of the economy? It's hard to answer no to either questions, I think.
At 26 times earnings, Logica is still not cheap. But there's no need to rush into buying shares at any price. Narrow down a short-list of companies that have attractive long-term prospects and have your fishing rod at the ready for when one of them comes close enough to the river bank.
More: Building A Share Portfolio
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