I Love Bear Markets

Admittedly, bear markets don't win many popularity contests.

Personally, I've witnessed only a few true bear attacks -- often defined as a pullback of 20% or more. During these turbulent times, stocks are spiraling lower, the economic prognosis is usually bleak, and financial media outlets seem to print one ominous headline after another.

And, of course, millions of investors watch helplessly as years' worth of gains are rapidly erased from their portfolios.

Unless you're a short seller, what's to love?

Callous though it may seem, we should still always feign interest, even without developing an emotional attachment -- at least until a more attractive market comes along. After all, all's fair in love and portfolio-building.

Consider some of the more notable bears that have sashayed onto Wall Street in recent decades:

Period

Duration in Months

S&P Total Return

Months to Break Even

Total Return One-Year After Hitting Bottom

01/62-06/62

6

(22.3)%

16

31.2%

12/68-06/70

19

(29.3)%

28

41.9%

01/73-09/74

21

(42.6)%

42

38.1%

09/87-11/87

3

(29.5)%

21

23.2%

03/00-09/02

31

(47.6)%

--

28.6%

*Source: Ibbotson Associates

True, none of these was particularly easy to look at, but stock investors would still have been wise not to shift their affections elsewhere -- like bonds or CDs.

As the table shows, it can sometimes take years for bear markets to run their course, but there's always a light at the end of the tunnel -- and those that stay true have been rewarded.

In this post-World War II era, there have been 12 bear markets that lasted an average of 10 months from peak to trough. However, after reaching the bottom, stocks (as measured by the S&P 500) have bounced back an average of 35.7% within the first 12 months.

It takes courage to scamper out for bargains when everyone else is ducking for cover. However, those who did so on Valentine's Day 2002 encountered beaten-up future starts like these:

Company

Price 2/14/02

Price 2/14/07

Five-Year Annualized Gain

Apple

$12.30

$86.15

+46.8%

Akamai Technology (Nasdaq: AKAM  )

$3.68

$56.95

+69.4%

E*Trade Financial (Nasdaq: ETFC  )

$9.08

$24.55

+21.9%

Genentech (NYSE: DNA  )

$24.94

$86.99

+28.4%



Of course, anyone approaching (or in) retirement should generally be somewhat cautious during indiscriminate bear markets.

However, those of us with more time to work with should embrace the occasional bout of panic selling, which can provide a golden opportunity to pick up quality stocks at rock-bottom prices. The longer these cyclical periods last, the longer we can continue to buy stocks on the cheap.

So call me crazy, but I for one would welcome a harmless fling with a bear market -- even if it isn't meant to last.

Fool contributor Nathan Slaughter is still scrambling for Valentine's Day gift ideas. He owns none of the companies mentioned.


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