VALUE INVESTING
Welcome To The Bear Market

By Stephen Bland (TMFPyad)
June 21, 2002

Well guys here we are then, this is what a real bear market looks like. We've had the market falling gradually over the last couple of years but recently this has accelerated with some large daily falls. My guess is that for many Fool readers this is their first experience of such conditions.

Since this is a value column, I am interested in exploring how deep value as a strategy stands up under such stress compared with other investment situations. For example, to take a widely held non-value strategy, anyone who started investing in index trackers over this period will be acutely aware of the general market situation and will be seriously down at present though this is of course a very long-term approach.

I already know the answer to how value stands up under bear pressure, having lived through this sort of thing before. The answer is that although the shares may fall, they are not likely to fall anywhere near as much as the market in general simply because of the safety features that characterise a value share. Sometimes they may not even fall at all and remain about static or even go on to deliver the rise for which the investor is looking.

I'll personalise this. Allders (LSE: ADS) is a share I've owned for some months now during which the market has slumped. But Allders itself has declined only about 8p from my 160p buying price. Against that I have had a dividend of 5.4p. So I'm down overall but only slightly at present. Would have been better to go up of course but the point I'm making is that the decline in this value share is only a small fraction of that suffered by the market and it is no accident. It is the classic safety net coming into use and that for me is the primary reason for being in value altogether, namely the minimising of the downside should something go wrong either with the share itself or conditions generally as we've seen.

In my experience, value will usually go on to do the business whatever the prevailing market conditions. That doesn't mean every time, it means sufficiently often for money to be made overall. Clearly though it is harder to make money when sentiment is against all shares as in a serious bear market, which this now is in my view. Sometimes a mood of gloom grips the market such that no shares at all appear attractive, however cheap. You may start reading rubbish in the press or on bulletin boards about how the market is finished and is unlikely to recover in our lifetimes, trotting out reasons why this should be so.

People react to justify the current state of affairs. It is what is known as  recent events syndrome, where investors lend too much weight to what has happened in recent times whilst ignoring much lengthier history. The nonsense of "this time it's different." It is the exact opposite of the excess optimism that occurs in runaway bull markets when any old rubbish can rise to enormous heights before the inevitable collapse.

What particularly amuses me are the attempts to supply reasons for serious bear, and bull, markets. Every time there is a serious up or down move, millions of words are written to explain this. Forget them, they are not true. Reasons are after the fact, driven by some sort of need in people to explain everything and journalists needs to fill up space. There is no reason why there has been such a sharp drop lately other than the most basic reason of all why things move in cycles – human nature. Sometimes you're up, sometimes you're down and very often these mood swings do not have a logical cause. You may notice this in your own personal life. Well, the market is just a collective personal life.

Value investors have to try and ignore market sentiment. If you are in cash, then lower prices will tend to offer more opportunities. As always, concentrate on individual share selection. It will continue to work although you may have to accept that it could take longer in periods when there is little interest in shares. But work it will. I've been there.