There’s no ex­cuse for not be­ing pre­pared when a down­turn hits, Tom Bradley writes.

Ottawa Citizen - - FINANCIAL POST - Fi­nan­cial Post Tom Bradley is Pres­i­dent of Steady­hand In­vest­ment Funds, a com­pany that of­fers in­di­vid­ual in­vestors low-fee in­vest­ment funds and clear-cut ad­vice. He can be reached at tbradley@steady­

My grey hair and creaky knees should tip you off that I’ve been do­ing this awhile. I started as a stock an­a­lyst in 1983, which co­in­cided with the be­gin­ning of a ma­jor bull mar­ket. In­deed, my whole ca­reer has had a tail wind be­hind it in the form of de­clin­ing in­ter­est rates. As a re­sult, bond and stock re­turns have been ex­cel­lent.

Along the way, how­ever, there were a few bumps in the road. As a cocky, young an­a­lyst, I sat on the edge of the trad­ing desk and watched the mar­ket melt­down on Black Mon­day (1987). I was CEO of one of Canada’s largest in­vest­ment man­age­ment firms when the tech bub­ble burst. And wouldn’t you know it, we were just get­ting started with Steady­hand when the fi­nan­cial cri­sis hit.

Those were the doozies that I’ll never for­get, but there were lots of lesser de­clines along the way. This brings me to the mar­ket gy­ra­tions of the last 10 days. This ex­plo­sion of volatil­ity doesn’t be­long on the list, at least not yet, but per­haps it’s a good time to dust off some truths about bad mar­kets.

1. Go­ing through down mar­kets is a nec­es­sary part of be­ing an in­vestor. It’s not a mat­ter of ‘if ’ a bear mar­ket will oc­cur, but ‘when.’

2. De­spite the in­evitabil­ity, there’s no cer­tainty as to a bear’s tim­ing, depth, shape or char­ac­ter. There­fore, it’s not to be avoided, at least not if you want to par­tic­i­pate in the equally un­pre­dictable up mar­kets.

3. You won’t know un­til af­ter whether the ini­tial de­clines (like last week’s) turn out to be an im­per­cep­ti­ble blip on a long-term chart (most are), or the be­gin­ning of a more fun­da­men­tal ad­just­ment. To­day, many ar­gue that a se­ri­ous de­cline is not pos­si­ble be­cause of the strong global econ­omy. Oth­ers point to his­tor­i­cally high val­u­a­tions, ris­ing in­ter­est rates and ex­ces­sive spec­u­la­tion as cat­a­lysts for a big­ger sell­off. Un­for­tu­nately, Mr. Mar­ket doesn’t is­sue warn­ings or hand out a pro­gram.

4. Don’t be­lieve ev­ery­thing you read. In a highly charged mar­ket, the quality of in­for­ma­tion is gen­er­ally poor. There’s plenty of it, but it’s more re­ac­tion than in-depth anal­y­sis.

5. There will be com­par­isons made to pre­vi­ous cy­cles. It’s a favourite pas­time of economists and com­men­ta­tors. From my ex­pe­ri­ence, cy­cles are too dif­fer­ent (eco­nomic back­drop, sec­tor lead­er­ship, cap­i­tal flows and val­u­a­tion) for them to be of any use.

6. There’s one thing that’s the same with ev­ery bear mar­ket. It starts with bullish in­vestor sen­ti­ment, what War­ren Buf­fett refers to as greed, and ends with ex­treme bear­ish­ness (fear). Art Phillips and Bob Hager, two of the founders of Phillips, Hager & North, taught me to use in­vestor sen­ti­ment as a con­trar­ian in­di­ca­tor. For ex­am­ple, if my cab driver or golf buddy are rec­om­mend­ing a stock, it’s time to be care­ful. In­vestor sen­ti­ment is a gut check that makes sure you’re not charg­ing off the cliff with the herd.

7. Don’t get too en­trenched on one point of view. The late Peter Bern­stein was my touch­stone on this. He said, “In calmer mo­ments, in­vestors rec­og­nize their in­abil­ity to know what the fu­ture holds. In mo­ments of ex­treme panic or en­thu­si­asm, how­ever, they be­come re­mark­ably bold in their pre­dic­tions.”

8. There’s no time for gloat­ing. Bear mar­kets are a god­send for long-term in­vestors. Ev­ery­one is scared and prices are down — it’s a beau­ti­ful thing. But if you get too caught up cel­e­brat­ing a stock you shorted, or brag­ging about your timely sell­ing, you’ll miss the op­por­tu­nity. Down mar­kets have a way of chang­ing rel­a­tive val­u­a­tions be­tween stocks, in­dus­tries and ge­ogra­phies. You must be ready to shift gears.

9. Don’t spend all your money in one place. I’m a big be­liever in taking baby steps. If prices move into an at­trac­tive range, get started, but keep some buy­ing power in re­serve. Prices could get even bet­ter.

The drama of last week may not amount to any­thing more than a blip, but it was a good wake- up call. If you found it alarm­ing and couldn’t sleep on Mon­day night, then you have some work to do. There’s no ex­cuse for not be­ing pre­pared for the next bear mar­ket.


De­spite the fact bear mar­kets are in­evitable, there is no cer­tainty as to their tim­ing, depth, shape or char­ac­ter, writes Tom Bradley. There is, how­ever, one thing that’s cer­tain with ev­ery bear mar­ket: it starts with bullish in­vestor sen­ti­ment and ends with ex­treme fear. To thrive in a down­turn, the savvy in­vestor must be able to shift gears quickly.

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