As I wrote last September when stock markets were rising and macro data weakening, bear markets with loss cycles greater than 20% are inevitable and recurring, but it’s not necessary that individuals lose along with them.
The last decade has seen the longest financial market expansion in history to some of the most extreme valuation measures ever, and still, most participants and professional asset allocators have no plan other than to hold and hope that price appreciation continues indefinitely. It never does.
Most stay long and wrong even though minimizing losses and having cash to buy assets near cycle lows are the most defining imperatives of compounding positive returns over an individual’s life cycle. It’s for this reason that Warren Buffett’s long proclaimed number one investment recommendation is Don’t lose money! And yet, most continually ignore this to their great detriment.
Riding rising markets during expansion cycles requires no skill. Effective management has rule sets to help anticipate down cycles and position to benefit through them. As Hedgeye CEO, Keith McCullough, put it today:
“Almost anyone can run money on the long side of Equities, in any country, when the equivalent of the VIX is trending and trading in the range of 8-16. That would be the equivalent of driving a car in London without anyone to pickup/dropoff and/or having any risk to manage. Not everyone runs money well in a developing or ongoing bear market (VIX 20-80 range).”
If you were shaken at the drawdowns in your savings from February 20 to March 23 and relieved by the rebound into early May, you have entered this bear market wrong-footed, and probabilities are that the pain is far from over. It’s not too late for self-preservation, but time is of the essence.
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