From 1959 to 1974, the Dow Jones Industrial Average gained precisely 0%. It has gone down as one of the longest and most painful bear markets of recent history. The FTSE 100 is currently in what is shaping up to be almost as long a bear market. Having peaked at 6930 on the last trading day of 1999, almost 9 years later it's down around 22% from that peak. From here, it could take another 5 years -- until 2013 -- to reach the 6930 level again. That would mean a roughly 14-year period of 0% returns for the index. Like the 15-year Dow Jones bear market from 1959 to 1974, it will go down as one of the biggest bear markets of all time. But the truth is, there's still money to be made in bear markets. But first, a warning ...Over the long run, most stocks are fairly valued. That's a major reason for the widespread belief in efficient markets, and by extension, an index-fund approach to investing. And indexers can do quite well -- they keep costs low, maintain wide diversification, and bet along with the entire market. But during times of market sell-offs, sticking with the index can leave you bruised and battered. For instance, investors who bought the FTSE 100 index at the turn of the millennium are still out of the money! That's a lot of moneyTrue, investors in individual companies potentially fared worse. Vodafone (LSE: VOD) rose to a high of 370p during the tech bubble but it now trades around 135p. Arm Holdings (LSE: ARM) is around 90% below its peak, as is former Freeserve owner DSG International (LSE: DSGI). Logica (LSE: LOG) traded at 2700p before the crash; now it trades at 130p -- a 95% loss. Ouch. But here's the thing: 14 or 15 years of 0% returns assume you invested one lump sum at the absolute peak of the market then never invested a single penny afterward. Those who bought stocks after the bear market started are actually sitting on some enviable gains. BAE Systems (LSE: BA) was trading around 420p at the peak of the tech bubble and is now at 450p -- but along the way, it traded as low as 110p. Cable and Wireless (LSE: CW) traded at over 1500p during the peak of the tech bubble, but since then it's been as low as 43p and as high as 200p. So the first thing about making money in this bear market is clear: Don't buy and forget. Monitor your existing holdings, sell if your thesis has radically changed, keep cash ready to pounce on new opportunities, and put that money to work on a regular basis. It may seem obvious, but an individual investor could have made far more money by investing throughout the bear market than during the irrational exuberance of the bull. Why am I telling you this?In July, the FTSE 100 officially hit bear-market territory -- and investors fled the market in droves. If you're among the droves, take a deep breath. Try to remember the lesson of the last bear market, when it was a huge mistake not to buy amid the panic. That's true even if we haven't hit the bottom. (If you do manage to buy a share right at the bottom of the market, it's probably just a fluke.) Instead of trying to time the market, consider buying great companies when they are trading at good prices -- even if it's possible they'll get even cheaper. Companies for bear-market profitsSo what do I mean, exactly, by "great companies trading at good prices"? Great companies: - Are in sectors and industries that offer excellent long-term prospects.
- Have long-term-focused, outstanding management teams.
- Have proven track records with solid financials.
- Have strong competitive advantages, such as a well-known and beloved brand.
And good prices? They're harder to judge, but I recommend that you always start with a simple reality check. For instance, by just about any valuation measure you care to use, the aforementioned ARM Holdings and DSG International were trading at ridiculously high levels back in late 1999. To find good prices, I like to start with the forward P/E ratio; anything with a forward P/E of 14 or less is worth further investigation in my book. Some companies currently fitting that bill (which also have some of the traits of "great companies") include: Company | Forward P/E |
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BHP Billiton | 7 | WPP Group (LSE: WPP)?? | 9 | Man Group (LSE: EMG) | 12 | Tesco (LSE: TSCO) | 14 |
?? An alternative to timing the marketI said earlier that in the long run, the market fairly values most stocks. In the short term, however, share prices rise and fall based on factors both rational (company news, earnings, supply and demand) and irrational (human behaviour). Those short-term irrationalities help long-term-focused investors profit. Bear markets can grow too irrational, affording you the opportunity to pick up shares of great companies at good prices. I wish you happy shopping! This article first appeared on our sister site, Fool.com. It has been adapted for UK readers.
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