FOOL'S EYE VIEW
Don't Take Bull From Bears

By Maynard Paton (TMFMayn)
August 15, 2001

Rochester, Kent – The FTSE 100 has fallen by around 20% since the beginning of last year. That performance has encouraged many stock market pundits, be they from the Sunday broadsheets, specialist investment magazines or Internet bulletin boards, to broadcast their thoughts on coping with a bear market. Unfortunately, most of the advice is akin to advising "buy on the dips", "you've got to be in technology" and "this time, it's different" during the late nineties bull market.

Here are five phrases that market commentators never tire of repeating these days -- and why Foolish investors should ignore every one of them.

"Look at how much you could have lost after buying shares over the past year or two. The building society is your best bet."

Anybody buying shares needs to take into account their investment time horizon. And for most people, that's a good decade or two. So, for Foolish long-term investors, judging the two-year relative performance of the stock market is nonsensical.

Using data from the CSFB Equity-Gilt Study, the stock market has outperformed cash 97% of the time during any ten-year period since 1918. While cash in the bank is undoubtedly the safest bet for a relatively short period, the stock market is the best home for the longer term. Granted, the stock market is volatile. But the ups and downs can be smoothed through regular index tracker payments.

"You'd better wait for a recovery in the stock market before buying more shares"

Market recoveries are only clear with hindsight. And more than likely, any "recovering" share prices will be bought at a price higher than what was available when you decided to wait.

For those currently thinking about suspending their index tracker contributions, take a lesson from the worst year in stock market history. Imagine you had perfect foresight and kept your stock market money in the bank throughout 1974. You'd have felt pretty smug by the end of the year -- the stock market fell by over 50%.

But get this. From a New Year low, the stock market surged 73% in January 1975 alone. And by the end of February 1975, the stock market had doubled from its nadir and regained its December 1973 level!

Anybody on the 1974 stock market sidelines had to be very nimble getting back into the recovering market. That's unlike those investors who kept buying shares during 1974 of course. Those who believed during 1974 that a market recovery would occur at some point (and they always do, you know) undoubtedly had a better long-term return on their investments than any 1975 recovery investor.

"In a falling market, an actively managed fund will always beat an index tracker. A tracker has to hold onto falling shares, while a fund manger can sell them."

Whether it's a falling market, a rising market or just a plain flat market, numerous studies have shown that actively managed funds generally underperform the stock market average. Instead, low-cost index trackers are always the starting point for investors who pass up on individual share picking.

Furthermore, if you are to rely on a professional's (or even your own) stock picking talents, then a raging bull market is actually the best time to invest. At least then you've got a better chance of any hand-picked shares going up.

"Shorting is the best way to make money in a bear market"

Tell that to the shareholders of Alliance & Leicester (LSE: AL.), Rentokil Initial (LSE: RTO) or Next (LSE: NXT), who've seen their shares rise 63%, 56% and 43% respectively over the past twelve months.

In fact, since August last year, in which time the FTSE 100 has fallen 14%, 44 of the top 100 UK shares have risen. In the stock market's top tier at least, it's hardly been a shorter's paradise of late. It may not be as exciting as shorting, but there are always plenty of opportunities for decent gains by simply buying the shares of well-established companies instead.

For the vast majority, shorting is a losing game. Rigid "investment" timescales, margin calls and the possibility of infinite losses stacks the odds against the punter.

"In uncertain times, investors should consider Value over Growth"

For starters, let's clear up a big misconception -- there's no difference between "value" and "growth" investing. They're identical. Everybody who treats buying a share the same as buying a part-ownership of a business looks for "value" in the share price. And that "value" is based on the future expectation of the company's profits, a component of which is growth.

If you're going down the DIY stock picking route, then you need to develop a personal investment strategy. And developing one that consistently beats the market over the long-term takes considerable time and experience. Needless to say, a stock market career will not be helped by chopping and changing share selection policies every time some other style becomes popular.

And what about those "uncertain times"? The future is always uncertain! So when people start talking about stock market certainties, that's the time to get worried. With so many commentators positive on "new economy" companies last year, danger wasn't far away. Now those same pundits are all talking negatively about the stock market, perhaps a market recovery is on the way? Maybe it's time to turn back to those tech stocks too?

Recap

Remember:

* Over the long-term, the stock market has historically outperformed any deposit account;
* Stock market recoveries are only clear in hindsight. They can occur rapidly too;
* Professional fund managers are just as at bad stock picking in a falling market as they are in a rising market;
* The shares of solid, well-known companies can rise significantly even when the overall market declines, and;
* When picking individual shares, the recent direction of the overall market should not determine your strategy. It's your experience, attitude and ability that count.

More: What To Do In A Falling Market | The Motley Fool's ISA Centre | Building A Share Portfolio