FOOL'S EYE VIEW
Bear Market Investing

By Stuart Watson (TMFTiger)
July 16, 2002

So here we are with the FTSE 100 back down below 4,000 -- at least it was the last time I checked. That was a whole hour ago and it has no doubt moved several per cent since then. I remember when the index climbed above this level for the first time. It seems quite a long time ago now, to put in mildly. With markets in the UK, US and Europe now all down around 40% since the start of 2000 the last few years can officially take their place as one of the three great bear markets of the last 100 years even though a large chunk of the falls have been squeezed into just the last two months.

Most people know about the Great Crash of 1929 of course. Over the following two years the UK market fell by around 40%, the same level of falls we have just witnessed. The 1973-74 bear market was even worse, with shares losing two-thirds of their value and the likes of NatWest almost going bust. The FTSE 100 would have to almost halve again to match this mother of all bear markets.

So could this happen? Of course it could. Share prices, like most other things in our economy, are simply a function of demand and supply. If there is no demand for them then, no matter how cheap you might think they appear on paper, prices will carry on falling until there is sufficient buying interest to balance demand and supply once again.

Trying to predict exactly where that point will be is a futile exercise though and probably the second-worst thing you could do at the moment. The worst thing you can possibly do being to believe someone else who claims they can make such a prediction. There's a paragraph in our UK Investment Guide (an updated version is due for publication later this year by the way) that sums this up nicely.

We have no idea where the stock market is heading over the next three years. Neither does anyone else. Do not listen to anyone on TV, on radio, or in the papers who presumes to be able to foretell the short-term market direction. This person is most likely an idiot. If you're convinced otherwise, research all of his or her previous market predictions. Compare those to the actual moves in the market and ... if you discover we're wrong, immediately e-mail us at FoolUKBook@fool.com.

Needless to say this address has not been flooded with the identities of stock market oracles. In my view this paragraph is well worth printing out and super gluing to the front of the file you keep your investment records in. Pundits will get lucky from time to time of course, but luck tends to run out eventually. There may be the odd oracle out there but, as with so many things, there's no real way of telling them apart from the fakes.

So what should you be doing with your shares and/or funds now? As always it's a case of balancing the potential risks against the potential rewards. The two main considerations are the price of shares, relative to alternatives like cash, bonds and property, and the amount of time you have to invest. The lower share prices go the more the potential rewards will outweigh the risks. Likewise the same thing happens the longer you have to invest. The length of time you have to invest is by far the more significant of the two.

In my case I'd say shares, on the whole, are cheap although not screamingly so. My investing horizon is 30 years plus however, meaning that at this level the rewards of owning shares make the risks look fairly insignificant. So I'm happy to continue being a net buyer of shares at the moment, just like I have been for many years already.