Bear market: What should you do?

Investment is the choice by the individual to risk his savings with the hope of gain. From 2002 to 2007, investors have profited from annual gains of 18% from the Canadian stock market. However, since the summer of 2007, this trend has reversed.

Investors should expect surprises when they receive their next account statements. Since June 2008, global markets have decreased significantly with drops of 22% in the United-States, 29% in Canada, 30% in Europe and 35% in China. Regardless of the choice of investments, without exception, all sectors of the economy have decreased. Market indices are now at the same levels they had attained at mid-2005.

The « bailout plan » proposed by the American government was accepted last Thursday, however, the stock market continued to tumble in reaction to the deceiving employment statistics in the United States.

What will happen during the next few months?

(My opinion): I anticipate nervous investors will decide to withdraw from the stock market once they receive their September portfolio statements. If such is the case, it could cause further pressure on the stock market to decline or even make it difficult for the market to rebound in the short term.

What should you do?

An investor must always respect his investment objectives and time horizon once he makes decisions concerning his investments. If you have placed money aside for you retirement in 10 years, it would be senseless to disrupt your plans based on short term market fluctuations.

If you are in a jet (STOCK MARKET) at 40,000 ft in altitude and you drop to 25,000 ft, the only thing that will help you climb back up there is that same jet. If you choose to jump onto a helicopter (GIC) close by, you may wait a long time before returning to your previous altitude of 40,000 ft or even longer if you are trying to attain 60,000 ft.

Warren Buffett also has a theory on this matter:

"Don't worry too much about the bad times, because the only time we have to fear them is when we are forced to sell during the bleak periods. If we are not forced to sell, then falling markets shouldn't matter. We should merely keep our shares until they rise again, and we can make profits again”. Warren Buffett

Click here to get more famous quotations from Warren Buffett.

Warren Buffett, the americain billionaire guru has anounced recently investments of 3 billion dollars in the company General Electric (GE) and another 5 billion dollars in Goldman Sachs, on top of numerous stock acquisitions in UBS Warburg and many other companies in the financial sector.

You could argue that "Mr. Buffett has billions of dollars, he can take that risk". That's true but let's not forget that Mr. Buffett is a self-made billionaire and has built his wealth with a « buy & hold » philosophy. When it comes to his personal life, he is a famous money saver. He gets paid only $100,000 each year by his company Berkshire Hathaway, as per his own choice. He donates through the “Buffett Foundation”, approximately 12 millions dollars annually. He has already indicated his intention to distribute 99% of his wealth, after his death, to charities (click here for his biography).

With recent events, his wealth has decreased by over a third. He has lost billions of dollars. Regardless of that, he doesn't sell his stocks in a panic frenzy. Instead, he regularly makes additional purchases... at a good discount. If this simplistic strategy works for him, couldn't it also work for us?

In retrospect

This is not the first, nor will it be the last time we encounter important fluctuations in financial markets. The table below demonstrates stock market returns in years following some of the previous financial crisis.

As you can see, the years that followed these financial crisis have been very profitable for those of us who were patient enough.

Warren Buffett is not the only one

Mr. Peter Cundill, renowned for having beaten the MSCI World Index in a consistent fashion since 1974, has recently made purchases of his own.

His mutual fund "Mackenzie Cundill Value" with assets under management over 6.1 billion dollars, (held in Meritage) held over 28.5% of liquidities on June 30th, 2008. Only 2 months later, on August 31st 2008, his fund had only 10.29% liquidities left.

Also, liquidities in his fund have been decreasing since September 1st. Cundill buys shares of companies that have decreased significantly with recent market turmoil, but that are not related to the financial services sector. He favors companies that have over 50% of their sales outside of the US, and that are sold at 6-7 times profits. He believes those companies should not be affected by an economic slowdown in the US.

Warren Buffett buys American financial institutions, while Cundill buys companies that are not related to the financial sector. Whatever approach each of the them has chosen, the point is that these managers, known for their good financial judgment, are making important purchases.

What are the risks associated to selling now?

Here is another exemple I would like to give you: The S&P500 index in the US has yielded an 11.8% return between 1986 and 2006. However, studies conducted by Standard & Poors reveal that the average investor who has invested in the US market has had returns of about 4.3%. Where does this difference come from?

When markets go down, some worried investors sell investments they had bought with a long-term investment horizon with the intention to buy back shares when the economy is in a better position. Thus, they sell at a discount after a huge market drop in the hopes of investing again a few months later when they can see an turnaroud.

In reality, most investors go back in the market much too late and miss out on the market rebound. This affects their long term investment returns.

Here are 3 presentations with some statistics (available in french only) :

• Évènements de marchés
• Investir à long terme
• L’importance de rester à la Bourse

I hope these illustrations have been helpful to you.