From 1959 to 1974, the Dow Jones Industrial Average gained precisely 0%. It has gone down as one of the longest and most painful bear markets of recent history.

The Nasdaq is currently in what is shaping up to be an even longer bear market. It's down around 50% from its peak of more than 5,000 in March 2000, and I would argue that it's likely to take another 12 years -- until 2020 -- to reach that level again. That would mean a roughly 20-year period of 0% returns for the index. Like the 15-year bear market from 1959 to 1974, it will go down as one of the biggest bear markets of all time.

But the truth is, there's still money to be made in bear markets.

But first, a warning ...
Over the long run, most stocks are fairly valued. That's a major reason for the widespread belief in efficient markets, and by extension, an index-fund approach to investing.

And indexers can do quite well -- they keep costs low, maintain wide diversification, and bet along with the entire market. But during times of market sell-offs, sticking with the index can leave you bruised and battered.

For instance, investors who bought the Nasdaq 100 index at the turn of the millennium are still out half their money!

That's a lot of money
True, stock investors potentially fared worse. Microsoft (NASDAQ:MSFT), a well-known blue chip, rose to a high near $58 during the Nasdaq run-up, but it now trades around $25. Cisco Systems (NASDAQ:CSCO) is almost 70% below its peak. Sun Microsystems (NASDAQ:JAVA) traded at $250 before the crash; now it trades at $10 -- a 96% loss.


But here's the thing: Those figures assume you invested one lump sum during the insatiable bull run, then never invested a single dime afterward. Those who bought tech stocks after the bear market started are actually sitting on some enviable gains. (NASDAQ:AMZN) peaked around $106 and is at $88 now -- but along the way, it traded as low as $7.48. eBay (NASDAQ:EBAY) trades at nearly the same price it reached during the peak of the tech bubble -- $27 -- but in the meantime, it's been as low as $9 and as high as $56.

So the first thing about making money in this bear market is clear: Don't buy and forget. Monitor your existing holdings, sell if your thesis has radically changed, keep cash ready to pounce on new opportunities, and put that money to work on a regular basis. It may seem obvious, but an individual investor would have made far more money by investing throughout the bear market than during the irrational exuberance of the bull.

Why am I telling you this?
In July, the S&P 500 and the Dow Jones Industrial Average hit bear-market territory -- and investors fled the market in droves. Year to date, stock mutual funds -- our best proxy for marketwide investor behavior -- have lost a net $20 billion in redemptions.

If you're among the droves, take a deep breath. Try to remember the lesson of the Nasdaq bear market, when it was a huge mistake not to buy amid the panic. That's true even if we haven't hit the bottom. (If you do manage to buy a stock right at the bottom of the market, it's probably just a fluke.)

Instead of trying to time the market, consider buying great companies when they are trading at good prices -- even if it's possible they'll get even cheaper.

Companies for bear-market profits
So what do I mean, exactly, by "great companies trading at good prices"?

Great companies:

  • Are in sectors and industries that offer excellent long-term prospects.
  • Have long-term-focused, outstanding management teams.
  • Have proven track records with solid financials.
  • Have strong competitive advantages, such as a well-known and beloved brand.

And good prices? They're harder to judge, but I recommend that you always start with a simple reality check. For instance, the aforementioned Cisco and Sun Micro were trading for triple-digit price-to-earnings ratios in 2000. That lofty valuation is tough to justify for any company, much less so many of them in a single sector circa 2000.

To find good prices, I like to start with the forward P/E ratio; anything with a forward P/E of 18 or less is worth further investigation in my book. Some companies currently fitting that bill (which also have some of the traits of "great companies") include:


Forward P/E

Johnson & Johnson


General Electric (NYSE:GE)




Apache (NYSE:APA)


An alternative to timing the market
I said earlier that in the long run, the market fairly values most stocks. In the short term, however, share prices rise and fall based on factors both rational (company news, earnings, supply and demand) and irrational (human behavior).

And here's the thing: Those short-term irrationalities help long-term-focused investors profit. Bear markets can grow too irrational, affording you the opportunity to pick up shares of great companies at good prices. (As the tech examples above show, buying great companies at bad prices almost always loses you money.)

The Foolish final word
That's our belief at our Motley Fool Stock Advisor investing service, which Fool co-founders David and Tom Gardner began during the bear market of 2002. Those early bear-market picks (stocks recommended between April 2002 and December 2003) have returned an average of 150% -- compared to 35% for the market as a whole.

We expect that some of the prices on our current recommendations will continue that trend. If you'd like to learn more about our track record, and get David and Tom's 10 favorite stocks for new money now, click here for a free 30-day trial of Stock Advisor. There's no obligation to subscribe.

Fool contributor Bruce Jackson doesn't own any of the stocks mentioned in this article. eBay and Amazon are Motley Fool Stock Advisor recommendations. Microsoft and Wal-Mart are Inside Value selections. Johnson & Johnson is an Income Investor choice. The Motley Fool has a wonderful disclosure policy.