[TOP STORY] Bear markets typically last for less than a year

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SIMON BROWN: I’m chatting now with Pieter Hundersmarck. He is 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 fairly common and they’re also usually fairly short in duration.

PIETER HUNDERSMARCK: That’s right, Simon. I think, just to maybe back up a step, the thing about bear markets and why we talk about worrying about them is they really engender quite a lot of fear. We talk about it being 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 people are looking at their investment statements and seeing drops of 10%, 20% of their accumulated wealth and it’s worrying and it causes fear.

If we look at history, it’s a way of addressing that fear directly and saying we are in one of those times where these things happen. I guess that’s the first point, which is [that] bear markets are common.

The analysis that we’ve done since 1928 shows that there have been 26 bear markets and 27 bull markets over that period. So that’s quite a number.

SIMON BROWN: It is. I suppose part of the trick as well is that, particularly in US markets, we haven’t seen one for a while. Usually every three or four years or so we will have one and they last about a year or so. It’s just that we’ve had a period without, particularly on the Nasdaq.

PIETER HUNDERSMARCK: I think that’s a great point, because what’s so unique about the current bear market is because we’ve been in such a long expansion since the 2008/2009 crash we can actually characterise that entire period as one long expansion – from 2010 all the way to today. The Covid drawdown was really not a severe bear market or even a long one, by any sense. So the thinking is we really are in for something a little bit deeper this time, just because the rise has been so strong. And I think that’s what is adding a lot of fear currently to investors in the market.

SIMON BROWN: And duration – I said they are fairly short. They are typically less than a year in duration.

PIETER HUNDERSMARCK: They certainly are, although if you ask investors when they’re in it, it feels like it’s going on forever. But it’s great to have that perspective. And again, the work that we’ve done shows that the average length of a bear market is 290 days, which is just under 10 months, and the average bull market lasts nearly three years, as you mentioned before. So they really are sharp traditionally. They are sharp and short corrections.

SIMON BROWN: That said, they can be severe. And 30%, 40% is the average in the note that you sent out, which suggests that we are maybe halfway or a little over halfway. Of course this could be a bear market that is less than the average, maybe even more, but to the point you made up top of the chat, I mean, your wealth disappears. It is nasty.

PIETER HUNDERSMARCK: Absolutely. We sit here and we talk about percentages, but to everyone – the man on the street and sophisticated investors alike – you’re receiving a statement at the end of the month, and it [relates to] the number of units you own times a price, and it’s actually a rand value or a dollar value that has gone up in smoke. So it is really coming back to that emotional challenge.

It’s nice to say that we’re only halfway through, but that doesn’t make it any easier.

So, we’re down currently around 20% and on average, we’ve seen declines in bear markets of between 30% and 40%.

But it’s really worth noticing that that 30% or 40% is actually the bottom and stocks don’t actually stay at that level for very long. They stay there for maybe a few days or at most a week, and then they start to rise again as investors look forward to the future, as the market always does.

It’s a forward-looking mechanism. So it’s important not to focus too much on that actual 40% or 41%, but [rather] just to wrap your head around this [being] the type of draw-down I should be able to experience and live through.

SIMON BROWN: That is the key point. I appreciate it’s easy for you and I to sit there on a telephone call and say that the best course of advice is to stay put. You’ve mentioned that it’s hard to do when your net worth is going up in smoke. But that really is what to do, particularly if they happen quickly, particularly at the bottom. And we are probably not going to get to time it right.

PIETER HUNDERSMARCK: Absolutely. I’m aware that many market commentators, including myself, have this tired refrain of ‘you need to stay put, and, you need to stay invested’. I get it, it’s tough, but we have history to guide us in terms of how these things work, and it’s important to remember that. It’s important to remind investors, even if they think we sound like broken records, like many of us do, but it is important,

because you can make really bad decisions to your wealth creation if you try or if you succumb to the psychological challenges, and if you decide to jump from fund to fund or from stock to stock.

I think that’s a refrain that must come through very powerfully in these times.

Just to remind people – for example, half of the market’s strongest days in the last 20 years occurred during a bear market. A third of the market’s best days occur in the first two months of a bull market well before it is clear that a new bull market is actually under way. So it just speaks to time in the market and not timing – again, something that investors, are very familiar with. But that does not make it any less true.

SIMON BROWN: And the key point, I think, is the one you made right up front. Since 1928 there’ve been 26 bear markets, but there’ve been 27 bull markets. Every bear market’s been followed by a bull.

PIETER HUNDERSMARCK: And the bull markets are stronger than the bear markets. So over the last a hundred years bear markets have made up a fifth of those years, but the markets rise 80% of the time and the overall direction of markets is to rise. So you actually at your peril decide to time the market because, if you get it right you can feel a bit like a hero, but if you get it wrong you’re going against an enormous amount of history.

SIMON BROWN: And then your wealth really has gone up in smoke.

We’ll leave it there. Pieter Hundersmarck portfolio manager at Flagship Asset Management, I appreciate the time.

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