May 23rd, 2010 | 
Author: Stock Market: Bull and Bear Markets
When we talk about bull and bear stock markets reminds me that it’s a zoo out there. And, like any zoo, there are quite a few wild (?) species to be found!
The first two are the bulls and the bears. We do know that a bull market is when stock prices are climbing strongly and a bear market is when they’re languishing.
One common myth is that the terms “bull market” and “bear market” are derived from the way those animals attack a foe, because bears attack by swiping their paws downward and bulls toss their horns upward.
This is a useful mnemonic, but is not the true origin of the terms.
Long ago, “bear skin jobbers” were known for selling bear skins that they did not own; i.e., the bears had not yet been caught. This was the original source of the term “bear.”
This term eventually was used to describe short sellers, speculators who sold shares that they did not own, bought after a price drop, and then delivered the shares.
Because bull and bear baiting were once popular sports, “bulls” was understood as the opposite of “bears.” I.e., the bulls were those people who bought in the expectation that a stock price would rise, not fall.
Both bull and bear markets are inevitable!
Smart investors try to anticipate both events to profit from their eventuality.
Bear markets are generally shorter in duration than bull markets. To avoid being hurt by bear markets you must recognize the signs early and move part of your assets into cash equivalent investments.
We do recommend that you invest for the long term. Don’t let the bears get you down!
Abraham Lincoln (1809 – 1865) once said: “When you have got an elephant by the hind legs and he is trying to run away, it is best to let him run!”
The same thing is true of bears – don’t panic and sell low. Let the bear market run its course, which history tells us is likely to be short.
On the other hand, a bull market can leave many investors feeling pretty good about their ability to prosper.
Their confidence bolstered by the good times …
Some even find themselves swept up in “Bull Market Myopia” and forget the basic tenets of smart investing, like asset allocation and portfolio diversification.
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Investing?
It is true that everyone who is involved in the financial arenas, each and every day is in a “new season” …A new season where winners or losers are declared at the closing bell!
In order to play “this game,” one has to adjust his/her thinking and that more often than not it means abandoning a “game plan” that is focused on long-term success, safety and balance!
To get back on track, investors must ignore the “loud voices” and stick to realistic long-term planning!
This means more criticism and less income from stock options.
It also means that analysts will have to focus on picking winners within a longer-term perspective.
The dilemma for the individual investor is to understand that the stock market is not a slot machine.
He/she will also have to understand that he/she will have to pay for research and understand that an investment is not a house that becomes a castle over night!
The word “investing” has always had long-term implications and that is the way it will have to be. Sure, there will be those that want to trade for the quick buck and that is just fine.
However, determining whether a market position is a win or loss after only i.e. several hours, is a more than certain way to ultimately become a loser!
Thus, many “investors” who become undisciplined, quick-buck artists, who do not depend on accurate analysis and research, they all end-up paying the price!
I do not think we will ever buy and hold forever and ever and ever …
But, by the same token, I do not think that we can trade stocks the same way we roll the dice!
Investing and Stock Market Risks Defining Risk
“Take a chance! All life is a chance. The man who goes the furthest is generally the one who is willing to do and dare. The “sure thing” boat never gets far from shore.”
Dale Carnegie (1888 – 1955) In 1998 Economics Professor and Nobel Prize winner Paul Samuelson (1915 – ) noted that:
“Many people now believe that if they simply hold stocks long enough they will not, lose money for statistics have shown that since 1926 the U.S. equity market has not suffered a loss in any given 15 year.”
He called it a fallacy, and conceded that it is truly likely that if you hold stocks over long periods of time that they would tend to produce returns higher than other assets. But to believe that it is a God given statement… Is simply not correct!
Investing and stock market risks do not go to zero over long periods, but there are many articles that reflect how risk goes down the longer the time period. What is seldom introduced is the fact that if there is a significant onetime loss, it can be monumentally overwhelming.
In any case, Samuelson noted that:
“The problem is that when stock prices do turn down (as inevitably happens even in the strongest of bull markets!) your optimistic equity exposure can overwhelm your gut level risk tolerance, leading to poor short-term judgments and even outright panic!”
Risk is a complex, multidimensional concept that manifests itself in various ways. Risk is omnipresent and includes stock market crashes, corporate bankruptcies, currency devaluations, changes in sentiment, in inflation and interest rates, and even major changes in the tax code.
Risk is generally defined as return volatility, or the degree of ups and downs of returns. But there’s more to risk than volatility. Risk and long-term reward are generally related. Risk is the chance that your actual return will be less than you expected.
People sometimes think that a good return can be achieved with little or no risk. Unfortunately, that’s impossible. To achieve your objectives, you need to assume certain risks and avoid others.
Your ability to handle risk is related closely to your individual circumstances, including your age, time horizon, liquidity needs, portfolio size, income, investment knowledge, and attitude toward price fluctuations.
What’s highly risky to one individual may be no problem to another!
Short-term fluctuations are not that relevant for long-term investors who have the discipline, patience, and understanding to deal with them. Stock funds are actually less risky than money market funds for those with long time horizons
The Benefits!
Of course the more money you have invested, the more you stand to gain if shares in your portfolio go up in value. Any rise in the value of your portfolio also means that your leverage level goes down, giving you the capacity to borrow even more, using the increased value of your shares as security.
Another plus of margin lending, is by having more money to invest in shares, you can afford to diversify more – reducing your downside risk.
The Dangers!
The danger, just like the attractiveness of this investment, is sharemarket volatility. If the sharemarket falls, not only will the capital value of your shares drop, but you could be forced to maintain the level of security for the loan if your gearing level breaches a preset level. This is known as a margin call, and would involve an up-front cash payment, a sell-off of shares at a loss, or the purchase of additional shares ( if you have the luxury of spare cash).
A margin call usually has to be met within 24 hours. In the event the investor can’t be contacted, the broker has the right to sell down the portfolio.
If your share portfolio is worth 75 percent of the loan and the sharemarket falls, you have to kick in more money to make sure that 75 percent is maintained.
In effect, any drop in the paper value of your investment increases your obligation to the lender. For this reason, any margin lending investment needs to be constantly monitored.