Value Investing / Main Index / previous / next

May, 2009


How did these terms, "bull market" vs. "bear market," originate and what can they tell us about what to do in the stock market? While the first meanings of both terms are obscure, it may be that a "bear market" was first noted when there was a thriving fur trade, and specialists in bear pelts had too many to unload and so wanted to sell a lot of them in a hurry, anticipating that their prices would soon decline, which, indeed, was sure to happen if there were many more sellers than buyers.

The name "bull" applied to a financial market, on the other hand, may well pre-date the use of bear for the opposite type of securities trading. As a bull has for millennia meant an animal that is very strong, often aggressive, and the most superior of which are also good at reproducing themselves, thus especially worthy of being bred for further strength and reproduction, it might reasonably be assumed that folks who hoped for similar results from their investments would have optimistically equated upward price surges with bulls' great strength and virility.

Another speculation is that the idea of bull vs. bear markets, meaning upward vs. downward trending fluctuations in a stock price or in multiple stocks' prices, came into common usage to liken them to the wagering that was done related to bull vs. bear fights. If one favored one animal over the other, he or she might then come to be called a bull or a bear, respectively.

It makes a kind of sense if one thinks of bulls as charging ahead and having upward angled horns, which they try to drive from low at first suddenly up into their opponents, hoping to damage vital organs, but bears as having a greater capacity to strike downward, from a more stationary reared up position, using savage attacks with their claws and teeth.

The irony is that, to paraphrase Warren Buffett, the best way to make money in stocks is to buy when others are selling, during the periods of maximum fear, and to sell when others are buying, during times of maximum greed.

Wall Street just after the 1929 crash (Wikipedia)

But this behavior is 180 degrees turned around from the meanings of bull vs. bear in our modern ordinary usage. Thus, if one follows conventional wisdom, one would buy more when others are buying and sell more when they are selling, a method seemingly assuring that, sooner or later, probably sooner, one will buy high and sell low. This is, in fact, what most retail investors tend to do and explains why they do not usually match even average performance.

One reason for the crowd's panic in 1929 (for which see accompanying public domain image) was that virtually everyone was selling. There were almost no buyers. Yet, less than a year earlier most everybody in the market had been euphoric, as almost everyone was buying. There was a "buyer's panic," and the fear was that one might not buy in time or enough to take full advantage of the terrifically mushrooming market. Almost no sellers could be found.

So, I much prefer the meanings of bull and bear as explained in the David Liss historical novel, A Conspiracy of Paper, in which the narrator explains, from the context of the early 1700s, that a bull is a stock specialist who is ready to sell, while a bear is one who is ready to buy.

After noting that most people in recent months have been net sellers, one could do well if simply adhering to the David Liss definition and therefore buying into that bear market.

Yet, when noting that most are net buyers, we might ultimately make more money if, again adhering to David Liss' historical meanings, we are ourselves net sellers into that bull market. In this way, one may guarantee buying low and selling high, a much more advantageous approach.

Human nature being what it is, this type of bull vs. bear cycle is repeated in all kinds of financial exchanges, not merely in equities, of course, but also in commodities, real estate, bonds, currencies, and so on. There is almost always somewhere to be found a bull market in something and a bear market in something else.

Still, the recent meltdown seems to have been particularly hard on stocks and real property. As there are now early signs of recovery, or at least of a slowing of the downturns, one might wonder if now it is too late to take advantage of the current bears in these type investments. But, for better or worse, both are as yet not nearly back to normal, in my view. Even though stocks have rallied roughly 30% since about nine weeks ago, the securities markets are still at approximately their levels at the end of last year, the final quarter of 2008 representing the worst three months for common stocks since the Great Depression.

In equities as well as residential real estate, then, there remain many bargains available. If one has the extra funds and is willing to do a little homework to find assets selling for less than they are really worth, this would seem as yet an excellent time to be a net buyer. With stocks or stock mutual funds, especially, good strategies are to buy on dips or on a regular, dollar-cost-average basis, thus acquiring more shares when prices are relatively low.


Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)

Value Investing / Main Index / previous / next