Benefits of 'The Bear Market' (2024)

While favorable circ*mstances are agreeable to human nature, and therefore, by most people welcomed and enjoyed, it is primarily amid trial and suffering that personal growth occurs, and in which the character is fashioned. My strongest memories as a mountaineer consist not of getting a photo shoot on the summits of 14,000 peaks in cloudless days, but of desperately trying to survive life-threatening storms, with a noticeably high probability of failure! Those terrifying storms proved far more influential to my development as a climber than all the clear days, as they exposed more weaknesses and required more focus, effort, and perseverance. This ‘Trial by Fire’ principle also applies to investing, and since bear markets (defined as a 20% decline in prices from the recent peak) routinely catch most investors by surprise, we’ll be wise today, while the coast seems clear, to consider the opportunities the bear market offers to improve our investing skills.

• Lower valuations on equities are offered, which reduces risk for equity investors. Notable investors build cash prior to a bear market, to purchase stocks at low valuations in a bear market, the very impetus of new bull markets.
• Significant buying opportunities are presented. The most profitable stocks most legendary investors ever owned were generally purchased during a bear market. Warren Buffet, Stan Druckenmiller, Howard Marks, Michael Burry, and countless others have attested to this.
• The market renders an advantage to the judicious buyer. When there are more sellers than buyers, smart buyers notice. When a ‘stampede for the exits’ occurs, smart buyers act. Just as more square feet of a house are exchanged for each $1 invested at low real estate prices, so are more future earnings of profitable businesses in a bear market! The contrarian market is masterful at drawing investors’ attention away from this central issue. The goal is not to strive to time the bear market bottom, but to accumulate great businesses at reasonable prices.
• The efficiency of ‘dividend compounding’ and ‘dollar cost averaging’ both increase during low, bear market pricing. Keep two things in mind: this benefit is realized in the late stages of the next bull market, and stocks purchased in a bear market must still exist at that time to benefit you. Bear markets generally accompany recessions, and recessions generally accompany bankruptcies. Aging climbers ascend only in pleasant weather. Become a scrutinous discerner of quality.
• The ‘Zombie cleanse’ of major bear market/recessions can turn mal-investment into productive capital, increase market competition and efficiency, and set the stage for both a sustainable growth economy and new bull market. Become a duration participant of new bull markets by learning how to behave in bear markets.

Climbing in those big White Mountain storms was crazy, but it greatly enhanced my under-average ability, and over-attention to caution. In 2016, while ascending Mt. Whitney in a light storm, we were astonished by the dozens of climbers literally running down the mountain in terror. The whole summit cone quickly became ours, and we confidently enjoyed the most enjoyable, and one of the safest climbs ever! This is how great investors would describe the bear market. Watch for big swings in sentiment. When universal despondency prevails, your greatest opportunity as an investor has arrived. Have a specific plan; “aim small, miss small”.

Think about it, Shaun.

“Give a portion to seven, or even eight, for you know not what disaster may happen on earth.” ~Ecclesiastes 11:2

“Lay up for yourselves treasures in heaven, where neither moth nor rust destroys and where thieves do not break in and steal, for where your treasure is, there your heart will be also.” ~Matthew 6:20-21

The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial.

All investing involves risk including the possible loss of principle. No strategy insures success or protects against loss. Dividend payments are not guaranteed and may be reduced or eliminated at any time by the company.

Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. Investors should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not insure a profit and does not protect against loss in declining markets.