VALUE INVESTING
The Great Bear Market Of The 1970s

By Stephen Bland (TMFPyad)
February 28, 2003

This week's article is not really a value matter I guess. As the oldest writer on the TMF team by about a hundred years, it was suggested that I might do a feature comparing the present bear market to the massive collapse of the early seventies. I am the only one sufficiently chronologically challenged to have been there.

I am writing from memory and my recollections may consequently be subject to the tricks that memory sometimes plays. At my age, I suffer from that affliction of the ancient in having the ability to recall distant events clearly, as far as I can tell, whilst sometimes forgetting the very recent. I suffer also from that other common ancient's ailment in that I tend to repeat myself, I tend to repeat myself.

I am not really one for trying to find causes for every market movement. This is an obsession of the financial press who seem unable to let any share price or index change pass without trying to find a reason for it. I have seen in my time the same reasons given on different occasions for a rise as for a fall. Even major market swings like the present three-year bear movement do not, in my opinion, have any real fundamental reason. Many quote the potential war against Iraq as the reason for the more recent element of the fall but I don't see what difference such a war would make to most shares really. As wars go, if it happens, it will be a nickel and dime affair compared with, say, Vietnam.

In my view, major bear markets simply appear every so often and that is all there is to it. There is no reason other than the human nature which underlies share price movements. Humans do not have a constant mood but swing from optimism to pessimism then back again over periods of years. I don't know why but they do and I know it is genetic. The only constant is change itself. One day in this present bear market, suddenly, for no reason at all, everything will look rosy again. It is illogical even though the commentators will try and put logical reasons to it. Don't believe it, the only reason is that people start looking on the bright side again for no reason at all other than they have had enough of gloom. Unfortunately these mood swings are not capable of prediction.

So back to the early seventies. The causes then, if you really want to buy into the causes idea, was a middle east war between Israel and its Arab neighbours. This was the Yom Kippur war after the Jewish holy day on which Israel was attacked. It was followed by a huge rise in the oil price. After that there was a lengthy and crippling bear market. It was the kind where even as a deep value player you buy in, only to find that it falls another 50% the next year. At its trough, I think the market as measured by the then index, the FT30, fell to something like a 25-30 year low. In tandem with the falling stock market there was a disastrous property crash. This got so bad that NatWest, if I recall correctly, was in danger of going under due principally to bad debts on large scale property lending. It survived only by the intervention of the government, who propped it up.

Let's compare this with the present situation. First of all the fall in the market, though severe, is nothing like a 25 year low. The FTSE100 index started at 1,000 in 1984, so is still way over that even after the three year bear market. In fact over the 19 years since the index commenced, this still represents a compound growth rate of about 6.8%. The index would probably have to drop to about 500 or something to resemble the seventies crash. Not impossible of course, anything can happen with equities and sometimes does.

The second major difference is that there is no property crash. In fact the reverse has occurred. Anyone holding property over the last few years has probably done very well, particularly in the South East.

The third difference is that the UK economy is in a reasonably good shape. Unemployment for example is modest, interest rates are low and so on. But in the early seventies, it really looked like the end of the world. Rolls-Royce, for example, went bust.

So I conclude that thus far, this is nothing like the early seventies – yet. I do not know whether the present market will suffer from a great further collapse so as to make it the bear of a lifetime. It is entirely possible but the present economic factors do not suggest as much to me. However, since when did the market pay that much attention to economic factors anyway? This is the mistake of trying to use macro events to predict markets. It ignores the human element. The market usually overdoes both the boom and the gloom times during major rise and fall periods as experienced investors will know. Humans have the capacity to look excessively on the dark side even if there is inadequate reason to justify this, and similarly to ramp up prices with no reason.

So we may well see a further collapse for no reason other than lack of investor confidence. There will be no reasons other than that despite the commentators' attempts to explain it. Or we may not.

I do though know one thing, if you buy a value share you will be rewarded ultimately even if it drops substantially meanwhile, provided the fundamentals do not deteriorate to any great extent over that which were in the price when you bought. That can be a big proviso sometimes. It takes nerve and patience.