Bull markets, bear markets…

Bull markets – share prices on the rise, fresh investment wealth being created, optimism abounding. Bear markets – share prices in decline, diminishing (albeit on paper) wealth, mounting pessimism. Both have their time and place in the world of self-correcting cycles. Both are to be welcomed, not feared, by serious investors.

The tug-of-war between bulls and bears became nothing short of ferocious in 1998.There had to be some painful experiences at the nosebleed levels to which the markets had risen. However, for genuine long-term investors, volatility like this also spelled opportunity.

Into what can only be another volatile and challenging year, a key question occupying the markets is how much longer the greatest bear market of our lifetimes can keep on going?

Fortunately, bear markets generally don’t last, while bull markets do. And despite the brief hiccup last fall, I am in little doubt the greatest bull market of our lifetimes lives on, even if it is getting long in the tooth. From 770 on the Dow Jones Industrial Average in August 1982 to 9200 at time of writing represents investment wealth multiplied 12 times – an entrenched super bull like no other!

In Canad there could be no doubting the onset of a new bear market, a precipitous fall in the TSE300 once again illustrating how Canadian volatility is more pronounced because of our heavy natural resource orientation. However, this decline turned out to be a relatively short affair before a partial recovery lifted this index to its present 6400.

In global markets, there can be no denying the bear that has gripped Japan throughout the 1990’s. Nor can the deflationary bear markets that have descended upon Southeast Asia be disputed. Pessimism still reigns, but I’m increasingly attracted by what I see as major turning points in Southeast Asian markets – Japan in particular.

What, then, are the lessons to be learned as the markets proceed along their roller-coaster fluctuations between the bulls and the bears?

First, historical evidence points convincingly to bull markets getting longer and their gains bigger, bear markets shorter and their declines smaller.

Second, bull and bear markets now occur in such widely-differing regions and rotations that it is possible to minimize the deleterious effects of the bear in some markets (e.g. Japan and Southeast Asia) by capitalizing on the positive effects of the bull in others (e.g. North America and Europe) through timely switching and diversification, the latter all the more effective when undertaken geographically.

Third, bear markets are not to be confused with pull backs to new support levels which are part and parcel of successful investing. This is what happened in 1998, and will more than likely be repeated in 1999 as markets seek new support levels and trading ranges. In the major pull back of 1998, think of the buying opportunities that presented themselves for properly positioned investors and portfolio managers with the welcome prospect of more of the same in 1999.

Opportunities like these also beg Warren Buffett’s question about worrying needlessly over the markets when there are the shares of great businesses to be bought at bargain prices. Fidelity’s Peter Lynch feels the same, both agreeing that time in the market is much more important than timing the market.

Therefore, let’s concentrate on positioning our portfolios to withstand shorter-term volatility and corrections, to take advantage of accompanying opportunities, and to ensure the superior longer-term growth and total return that proper balance, diversification and positioning will make possible.

Add an undervalued Canada Inc. – now on the right fiscal and economic track (and cheaper in international currency terms than ever before), and pro-active, properly-positioned investors have everything to look forward to in the challenging yet dynamic, opportunity-laden period ahead.