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The Jamaica Stock Exchange building on Harbour Street, downtown Kingston.
Hopeton Morrision, Contributor
NOTWITHSTANDING THE fact that the market rallied by just under one per cent for the week up to Thursday of last week, there has been predictable speculation even among financial professionals that the bear market has bottomed out, but only time will tell.
If you could have timed the onset of the bears on April 26 last year, when the market hit its peak, then you would have sold your stocks on that day with the intention of going back into the market when you become convinced that shares had hit the bottom.
But no one can tell when a market will peak. Within this scenario, however, the two predominant investment methodologies for equity investing do offer some insights.
A SOURCE OF CONCERN
Attempting to time a bull market is not only an inexact activity, but it is certainly not science. Investment professionals who have spent an entire lifetime in the markets cannot time the market, so it is always a source of concern that some investors believe that they know more than the professionals, and thus set out to 'beat' the market.
Success here is rare indeed. We suggest that rather than spending your time trying to beat the market, your time would be better spent seeking out solid performers in the market.
Having found them, one legitimate approach is to 'buy and hold' for the long haul, for the simple reason that in a bear market, it is safer and ultimately more profitable to ride out the dips.
A study of the English market some years ago spoke to the period 1926 to 1990, comprising some 780 months.
CONCENTRATED SPURTS
If you happened to be out of the market for short periods, that amounted to seven per cent of that time, you would have earned nothing at all for your 64 years of investing.
The argument is that the gains made in bull markets usually come in concentrated spurts for very short periods.
But there is also a serious downside to the buy and hold approach. Trainers Incademy.com speak to another study that addressed an investor buying into the United States market in 1929 and holding those stocks through the great depression of the 1930s.
That investor would have recovered his/her 1929 value 25 years later in 1954 or stated another way, endured 25 years of zero growth.
Some persons invest a predetermined sum on a periodic basis known as dollar-cost averaging. This approach is very effective as when prices are low as in bear markets, your predetermined amount of investment buys more stocks. Similarly when prices rise again your investment will buy less stocks.
The important difference, however, is that you are never paying more than the current worth of your investment and so the cost of this evens out over time.
In fact, this method of investment is always recommended in all market situations as investing lump sums can incur the real risk of coming in at the top of a bull market.
STANDOUT BARGAINS
Although the general trend in bear markets is a downward movement in the indices, some stocks will still remain standout bargains.
These shares could appreciate quite impressively for a number of reasons including the fact that these companies will survive any recession in the market or economy.
These are known as defensive stocks and investors identify those sectors where the product remains a necessity notwithstanding market or economic downturns. A company with a significant food manufacturing and/or distribution focus will survive as persons need food for survival.
Other sectors that have done well historically in bear markets also include soft drink manufacturers and pharmaceutical companies.
Cable & Wireless would also be a good defensive stock here. The point is that in harsh economic times as in good times people still eat, drink, purchase medicines, and make telephone calls.
SAFE BET
It is always a safe bet, however, to seek out those blue chips that are 'conservatively' managed. The rationale is that although blue chips bear the lion's share of an initial sell off, that liquidity factor becomes just as crucial once the bulls reappear because of the ease with which these shares are traded.
It is also that liquidity factor that keeps these blue chips attractive to institutional investors who ultimately determine when the bears cease roaming.
Hopeton Morrison is general manager of St. Thomas Cooperative Credit Union Ltd., and lecturer in the School of Business Administration at the University of Technology. Please send comments and questions to: hmorrison@stccu.com
