[TOP STORY] Bear markets typically last less than a year
SIMON BROWN: I am now discussing with Pieter Hundersmarck. He is a portfolio manager at Flagship Asset Management. [You wrote an article entitled] “Six Things About Bear Markets.” Pieter, I appreciate your time today. The first two points are that they’re actually quite common, and they’re usually quite short.
PIETER HUNDERSMARK: That’s right, Simon. I think, just to maybe step back, the problem with bear markets and why we talk about worrying about them is that they really breed a lot of fear. We talk about an emotional roller coaster and we use terms like “difficult” and “emotional,” but what we’re really talking about here is fear. The fact is that people look at their investment statements and see 10%, 20% declines in their accumulated wealth and that’s worrisome and it causes fear.
If we look at history, it’s a way of directly addressing that fear and saying that we’re in one of those times where these things are happening. I guess that’s the first point, which is [that] bear markets are common.
Our analysis since 1928 shows that there have been 26 bear markets and 27 bull markets during that time. So that’s quite a number.
SIMON BROWN: He is. I guess part of the problem is also that, especially in the US markets, we haven’t seen any in a while. Usually every three or four years or so we will have one and they last for about a year or so. It’s just that we had a bad period, especially on the Nasdaq.
PIETER HUNDERSMARK: I think that’s a great point, because what’s so unique about the current bear market is that we’ve had such a long expansion since the crash of 2008/2009 that we can actually characterize this whole period as a long expansion – from 2010 until the end to today. The Covid pullback really wasn’t a severe or even long bear market by any means. So the thought is that we’re really into something a little deeper this time around, just because the upside has been so strong. And I think that’s what’s adding a lot of fear to investors in the market right now.
SIMON BROWN: And the duration – I said they are quite short. They usually last less than a year.
PIETER HUNDERSMARK: They certainly are, although if you ask investors when they’re there, you’ll think it goes on forever. But it’s great to have that perspective. And again, the work we’ve done shows that the average length of a bear market is 290 days, or just under 10 months, and the average bull market lasts almost three years, as you can see. mentioned earlier. So they are really sharp traditionally. These are sharp and brief corrections.
SIMON BROWN: That said, they can be serious. And 30%, 40% is the average in the rating you sent, which suggests we’re maybe halfway there or a little over halfway. Sure, it could be a below average bear market, maybe even more, but at the point where you’ve taken over the cat, I mean, your wealth disappears. It’s mean.
PIETER HUNDERSMARK: Absolutely. We sit here and talk about percentages, but for everyone – the man on the street and the sophisticated investor – you get a statement at the end of the month, and it [relates to] the number of units you own multiplied by a price, and it’s actually a rand value or a dollar value that’s gone up in smoke. So it really comes down to that emotional challenge.
It’s nice to say we’re only halfway there, but that doesn’t make it any easier.
So we’re currently down about 20% and on average we’ve seen declines in bear markets between 30% and 40%.
But it’s definitely worth noting that that 30% or 40% is actually the bottom and stocks don’t stay at that level for very long. They stay there for maybe a few days or at most a week, and then they start rising again as investors look to the future, as the market always does.
It is a forward-looking mechanism. So it’s important not to focus too much on that real 40% or 41%, but [rather] just to wrap your head around it [being] the type of lowering that I should be able to experience and experience.
SIMON BROWN: This is the key point. I appreciate how easy it is for you and me to sit on the phone and say the best advice is to stay put. You mentioned that it’s hard to do that when your net worth goes up in smoke. But it’s really the right thing to do, especially if they happen quickly, especially at the bottom. And we’re probably not going to come at the right time.
PIETER HUNDERSMARK: Absolutely. I’m aware that many market commentators, myself included, have this tired refrain of “you gotta stay put and you gotta stay invested”. I get it, it’s hard, but we have history to guide us as to how these things work, and it’s important to remember that. It’s important to remind investors, even if they think we look like broken records like many of us, but it’s important,
because you can make very bad decisions for your wealth creation if you try or succumb to the psychological challenges, and if you decide to jump from one fund to another or from one security to another.
I think it’s a chorus that must come across very powerfully in these times.
Just to remind people – for example, half of the strongest market days in the last 20 years have happened during a bear market. A third of the best market days occur in the first two months of a bull market long before it is clear that a new bull market is actually underway. So this is only about time in market and not timing – again, something investors are very familiar with. But that doesn’t make it any less true.
SIMON BROWN: And the key point, I think, is the one you raised at the outset. Since 1928, there have been 26 bear markets, but there have been 27 bull markets. Every bear market was followed by a bull market.
PIETER HUNDERSMARK: And bull markets are stronger than bear markets. So in the last hundred years, bear markets have accounted for a fifth of those years, but markets go up 80% of the time and the general direction of markets is up. So basically you decide at your own risk to time the market because if you do it right you can feel a bit like a hero but if you get it wrong you go against a huge amount of history.
SIMON BROWN: And then your wealth really went up in smoke.
We will leave it there. Pieter Hundersmarck portfolio manager at Flagship Asset Management, I appreciate the time.