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Investors must prepare to bear down for a while

Updated: May 3, 2013 12:14PM

Originally published: September 5, 2002

Please don’t feed the bears! They’re not as cute and cuddly as they look at first glance. Investors now understand the warning posted in our national parks, and wish it extended to the stock market. It’s always a mistake to underestimate the danger of a bear.

Very few of today’s investors have lived through a prolonged bear market. The 1987 stock market crash taught one lesson: that the market will rebound immediately, moving to new highs. But 1987 was a very unusual, very short bear market. And it was a mistake to generalize from one experience.

Rock bottom vs. quicksand

Bear markets don’t typically hit rock bottom. They’re more like quicksand--tough slogging, sinking deeper into the muck, sucking the will to struggle out.

That’s why the 1973-74 bear market was so devastating. The S&P 500 stock index fell 48 percent from top to bottom. The Dow Jones industrials fell from over 1,000 to an intra-day low of 570.01.

But for many investors, that sharp decline over 18 months wasn’t the worst part. What was really awful was the way the Dow bounced around at those low levels for the next eight years. In l982 the Dow was still below 800, and many investors had completely given up on the stock market and mutual funds.

Of course, that’s what makes bottoms, when everyone throws in the towel. And after a really crazy bull market, it takes that much longer for people to forgive and forget. But even with all the turmoil in the world, gold is nowhere near its 1980 highs of more than $800 an ounce.

As we focused on the U.S. markets this week, the Japanese stock market hit a 19-year low. From a high of 39,000 on the Nikkei index in 1989, that market fell to 10,000 a few years ago, rallied for a while, and is back down near 9,000. Not even bargain-basement prices--and nearly zero percent interest rates--can induce Japanese investors to venture back into the stock market.

The slight market rally in the United States during the last two weeks of August led to hopes that the bear market was over. But that’s typical of bear markets, a bounce labeled “bear market rally.” When traders came back from summer vacation, the selling resumed, and overwhelmed timid buyers.

On Tuesday, with 1.2 billion shares changing hands, decliners led gainers by a 3 to 1 margin on the NYSE. The same ratio applied to the 1.3 billion shares traded on the Nasdaq.

Yes, for every share sold, there was a buyer, but at lower prices. As the floor traders say: “The sellers were more aggressive than the buyers.”

Destroying myths

Each bear market destroys its own set of myths. The 1973-74 bear market destroyed the myth that there are individual stocks you can buy and hold forever. “One-decision stocks” they were called back then. Many of those “growth stocks of the future” are in dire straits today: Xerox, Polaroid. Others are long gone.

This bear market has destroyed the myth that one man, even a man as powerful as Federal Reserve Chairman Alan Greenspan, is bigger than the markets. He admitted as much over the weekend, saying the Fed was unable to slow the bubble and bring the market to a gentle landing. What a shame he didn’t admit to that impotence earlier.

It was nice to think that Alan had the market under his control. Truth was, he was along for the ride just like the rest of us. No one person can ever be bigger than the market, because the market is all of us.

And not all, but enough, of us have become sellers instead of buyers. Until that universal psychology changes, we’re stuck in a bear market. And that’s The Savage Truth.

Terry Savage is a registered investment adviser and is on the board of directors of McDonald’s Corp. and Pennzoil-Quaker State Co. Send questions via e-mail to She appears weekly on WMAQ-Channel 5’s 4:30 p.m. newscast.

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