The Logic of Hoping for a Bear Market[Fool on the Hill] May 11, 2000

An Investment Opinion

The Logic of Hoping for a Bear Market

By Bill Barker (TMF Max)
May 11, 2000

A few of us were sitting in a swelteringly hot room yesterday taping a Fools' Roundtable conversation on the subject of market bubbles to be published in the July issue of the The Motley Fool Monthly magazine. It was a pretty decent exchange with only a couple actual brawls developing, and I hope you all rush out and buy copies of the magazine. (Alternatively, you can just show up at one of our investment convention appearances, such as this Saturday's in San Diego where we tend to give out copies of the magazine and lots of other free stuff at our table.)

At one point in the conversation, I mentioned that everyone who was in the room -- all in their thirties, except for Matt "Boy Wonder" Richey -- should be hoping for a roughly flat or slightly down market over the next 10 years. It was one of those points that is sort of obvious to most of us, but not necessarily intuitive for everybody, especially given the nature in which stock market movements are generally reported. I'll expand on the concept just a little bit today for those who aren't familiar with our type of thinking on this issue.

As is so often the case, the best place to start is with a good Warren Buffett quote:

"If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices."

(Check out our special on the most recent Berkshire Hathaway) shareholders meeting, and The Toronto Investment Club Quote Archives for a bunch of other great Buffettisms.)

I'm pretty sure that everybody sitting in that room with me yesterday plans to be a net saver during the next five years, and indeed over the next 10, 20, and probably 30 years as well. If I read our demographic charts right, most people reading this column should fall into that category as well. Anybody who is employed, healthy, and not planning on retiring in the next five years should be a net saver (or paying down their debt), and shouldn't be hoping for higher stock prices in the short run at all. You're simply better off being able to buy shares of great companies at fair or depressed prices than at higher prices. Thus, I tend to think of the market as having been a generally helpful one this year.

While too many media outlets seem to cover a momentary drop in the stock market as an unambiguous negative, and the specter of a longer drop as reason to panic, investors should keep in mind the words of our honorary founder, William Shakespeare: "There is nothing either good or bad, but thinking makes it so." (Hamlet, act ii, scene 2.)

Unfortunately, we seem as a society to have chosen to think that stock prices going down is something bad, but that's only true for those who conceive of stocks as things that they wish soon to sell or perhaps those that envision the stock market as a way to "win" money for free. It's too bad that that notion has somehow taken hold because it's so obviously false.

If instead you are one of those who think of the market as a place to which you'll be constantly adding dollars over the course of your working life, if you think of stocks as things that you wish to hold for many years after choosing to participate as a partial owner of a specific business or the American economy in general, then you should wake up these days hoping prices of stocks will just stop going up all the time.

Ideally the stock market is a place where we witness people delaying gratification, rather than pursuing it. The market is really a place to set aside some money, methodically adding to your savings with the knowledge that over the long run the historical returns of the stock market will reward the patient investor. Too often, instead, we see it portrayed as a get-rich-quick vehicle on the one hand, and a voracious devourer of people's savings on the other. But neither of these is going to be true for very many of those participating in it.

Declines in the market are a bit like rain -- everybody knows that we need lots of rain to make things grow, but you almost never see rain being discussed as a good thing on the weather reports, do you? (Unless, of course, there's been a drought.) In the same way, down markets are a necessity for those in the saving stage of their lives (i.e., the majority of Americans) to be able to buy stocks that have the potential to grow at an acceptable rate. My four-month-old daughter, if she were able to talk, would certainly want the $500 that is annually going to go into her education IRA for the next 10 years to be buying stocks at low prices, and would hope for a bull market to start no earlier than her 10th birthday or so -- if that early.

I'm not trying to prove that a bear market is a positive for everybody -- of course it isn't. For instance, the strong economy that sets up a bull market makes everybody a lot easier to be around and much more likely to buy you a drink than during a recession. Plus, I'm not oblivious to the fact that there are a lot of people who are at or nearing retirement (see our Retirement area if you're one of them). Indeed, my parents are at an age where it is logical for them to wish for something other than a bear market over the next 5, 10, and 15 years.

However, the notion that is conveyed so often that everyone who has money in the market is and should be fearful, depressed, mad and likely to abandon stocks if they don't move up every day or every year is just wrong and terribly unhelpful. I understand how putting that story forth helps sell newspapers and keeps people's eyes glued to the tube, but I'd prefer that the space that it takes up in the media be replaced by something more useful. For instance -- whatever happened to that Elian Gonzalez kid?