Making Friends With Bear Markets

If you are trying to avoid the next bear market, Validea CEO John P. Reese has some advice: Stop trying to avoid the next bear market.

In a piece for, Reese cites a recent column from Mark Hulbert, who monitors the performance of hundreds of investment advisors through his Hulbert Financial Digest. Hulbert says that over the past 15 years the best performers have been those who have stayed the course through bear markets. Those advisors he tracks who by and large avoided stocks during either the 2007-2009 or 2000-2002 bear market – when stocks were pummeled – are not among the best overall performers since 2000, primarily because they failed to get back into the stock market at anywhere close to the bottoms of those bear markets. The five top performers since March 2000, meanwhile, have all been fully invested throughout the nearly 16-year period.

Reese, who has spent more than a dozen years studying history’s greatest investors, says that news doesn’t surprise him. “Warren Buffett often advises against trying to sidestep market declines,” Reese says, noting that in their book The New Buffettology, Mary Buffett and David Clark wrote that “Warren believes that corrections and panics are perfect buying opportunities for the selective contrarian investor.”

Mutual fund legend Peter Lynch, meanwhile, once told PBS that bear markets are inevitable, Reese says. “When they’re gonna start, no one knows,” Lynch said. “If you’re not ready for that, you shouldn’t be in the stock market. I mean stomach is the key organ here. It’s not the brain. Do you have the stomach for these kind of declines?”

The problem with trying to time a bear market, Reese says, is that doing so involves not one but two very difficult calls. “You not only have to pick the right time to get out of the market; you also have to pick the right time to get back in, or else you miss the bounce back gains that occur when a bull market starts,” he writes. “Usually, some of the most dramatic gains come in the opening stages of a bull market. Had you been just one month late jumping back into the market after the March 9, 2009 bottom — and given how much fear is usually present at a market bottom and in the following months, you likely would have been late – you’d have missed out on a 27% S&P 500 bounce-back. If you were two months late, you’d have lost out on a 37% gain.”

Reese says that most investors are best off sitting tight and trying to pick up bargains during bear markets. He highlights a handful of stocks that have been catching the attention of his Guru Strategies, which are based on the approaches of highly successful investors like Lynch and Buffett. Among the stocks he examines: Tractor Supply Co.