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Bear Baiting

In 1919 Oliver Wendell Holmes, Jr., the noted Supreme Court Justice, wrote in a seminal  case regarding the freedom of expression under the Constitution , “The most stringent protection of free speech would not protect a man falsely shouting fire in a theater and causing a panic.”  While Holmes reconsidered his opinion in later years, with these words he articulated a canon of public morals; that there is nothing protected and no inherent right to speak falsely or maliciously, causing a public panic or disarray.

What are we then to make of the various pundits, talking heads, money personalities and purveyors of financial  pornography on TV, the internet and in print, who gin up emotions each time financial markets make a dramatic move upward ( “is this a new bull market”) or decline precipitously ( “this is a global meltdown!”)  Since most of these moves signify nothing, (that is, nothing of importance in understanding the future of investment markets and future returns), what blame should we apportion to the media for wild, confidence diminishing market volatility that damages the mind-set of the average investor? Most charitably we could say they are merely doing their job, drumming up a viewing audience, pumping up ratings, repeating events over and over, indulging in outrageous hyperbole, commenting and re-commenting, having additional experts repeat and comment on each other’s opinion and comments…well, you can see where this is going.    At worst, they are sucking us into a  daily money soap opera, with each weekly trading day a clash between good (the Bulls) and evil (the Bears), wasting a lot of our time and emotional energy, and in our opinion, misdirecting our attention from the real issues.

In this environment main street investors can hardly be blamed for seeing financial markets as an unfair, unreadable and emotional casino that is eternally stacked against them.  Having been scarred by the recession, we are like survivors of a heart attack; every slight indigestion or agita sends us running for the nitroglycerin…or the exit doors, buying and selling investments willy-nilly.

On balance, we believe the effect of real time data, and the proliferation, accessibility and speed of market and financial information adds to market efficiency and is truly positive for investors.  The impact on volatility…well, it’s become the price we have to pay. Still, we don’t really need all those market cheerleaders muddying the waters. We’re a lot better off than investors in past years; in 1929 many had to wait days for information, only to find out they had been totally wiped out.

  John Kenneth Gailbraith, in his book The Great Crash of 1929, describes the effects of his generation’s bear market.

                “The singular feature of the...crash was that the worse continued to worsen. What looked one day like the end proved on the next day to have been only the beginning. Nothing could have been more ingeniously designed to maximize the suffering, and also to insure that as few as possible escaped the common misfortune."  (Of course, the people who bought at the top and their funds are ruthlessly eliminated first). "The man with the smart money, who was safely out of the market when the first crash came naturally went in to pick up bargains. The bargains then suffered a ruinous loss. Even the man who waited out all of October and November, who saw the volume of trading return to normal, and saw Wall Street become as placid as a produce market, and who then bought common stocks would see their value drop to a third or a fourth in the next 24 months. The...bull market was a remarkable phenomenon. The ruthlessness of its liquidation was in its own way, equally remarkable."

No one can know the difference between a correction, when markets pull back 5-10 %, consolidate, and resume their advance, and the beginning of a bear market, in which the stock market ultimately falls 20% or more.  While the media fire up their over-emotional coverage, it helps to recall the real frequency of market corrections and bear markets.

Frequency of Market Corrections-1900 through December 2012

Market Corrections 1900 - 2012

We are better able to maintain investment equilibrium if we understand the ebb and flow of financial markets. Bear markets occur more often than we think; over the last century 32 times, or about 1 out of every 3 years, lasting on average 367 days. The most recent, of course, was 2008’s 37% decline. In the year after each of the three previous 20% tumbles, markets gained an average of 32% (source: BTN Research).

Steven Weber, Gloria Harris, and Frank Weber are the investment and client services team for The Bedminster Group, providing investment management, estate, and financial planning services. The information contained herein was obtained from sources considered reliable. Their accuracy cannot be guaranteed. The opinions expressed are solely those of the authors and do not necessarily reflect those from any other source. Discussion of individual stocks are informational and do not constitute recommendations to purchase.

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