Rational Investing: Bear market welcomes investors to 'the real world'

I used to hate it when my Dad would say to me, "Look at it as a learning experience." That comment usually came after I had been disappointed with the outcome of whatever I was doing, like not making the first team in basketball or getting turned down (or stood up) for a date.

And my kids hated hearing my, "Welcome to the real world," when they faced those inevitable and often unpleasant life experiences of actually working for a living.

At the risk of sounding pedantic, there are truths in both expressions when it comes to what has happened in this grind em down bear market.

Oh, yes, there are a number of other expressions we could toss in to add some additional flavor and perspectives, such as, "No tree grows to the sky," and "No bubble goes unpopped." How about, "They don't ring a bell at the bottom," or (my favorite) "In a bear market money returns to its rightful owners."

I recently ran across a quote from a very successful known money manager, Chris Davis (no relation) who said, "You make your money in bear markets you just don't realize it at the time."

But what consolation is there in quotes, especially the ones that sound like "I told you so"? How is one consoled when his investment selections have declined by double digits? When his "sure-fire" Internet stock has filed for bankruptcy? When the chief executive officer of his telecom stock has committed fraud? Ugly!

Frankly, an investor isn't consoled by the fact that he is not alone. He does not see the reverse side of his logic of buying those stocks "because everyone knows they are the wave of the future."

Now that same "everyone" is in the same lost-money boat, but in this case being where everyone is does not help at all. But he can take away from it knowledge to assimilate and use to avoid catastrophic losses in the future.

Every generation must learn the consequences of excess, and nowhere is that more evident than in the world of investing. I have written before that the most costly investment expression of all time is: "This time it's different."

Run don't even give it a second thought or glance back just run from whatever that expression is used to describe. Politics change, economies ebb and flow, industries develop and sometimes disappear, but human nature doesn't change. And the two strongest emotions in investing the ones I wrote about in my last column remain fear and greed.

They are difficult for many of us to handle. Even conservative, long-term-oriented investors stretched for the gold ring in the late 90s after watching their value portfolios of stocks and bonds not even come close to matching the near instant returns of the IPOs, the dot-coms and the tech stocks with their promise of tomorrow because "this time it's different."

At the beginning of the first quarter of 2000 all was right in the world. Paradigms had shifted, inflation had been conquered, and the new economy would provide 20 percent plus investment returns and could be managed to avoid bear markets.

What went wrong? Just the same old excesses that have repeated themselves throughout history From Tulipmania* to the present, as one after another industry or scheme has caught the eye of those who either believe they can get rich quickly or who want badly to get on the bandwagon when they see friends or acquaintances get ahead of them financially.

Now we are waiting for the pendulum to finish swinging too far in the other direction, where it has manifested itself in the fear of loss and the dumping of even good companies' stocks. Although more signs are accumulating that we are nearing the end of the sell-off, don't expect it to be a V shaped recovery. Just as it took time for the market topping-out process to generate the downward momentum that created the bear market, so too will it take time for a base to be built from which a sustained recovery can take place.

Assemble your shopping list of companies whose stocks you wish to own and the prices at which they would become attractive with the metric you use. (For suggestions in this area read my previous columns about PEG and Price to Sales.) Continue holding your intermediate maturity bonds. Be patient.

*(For an intriguing and very informative look at how this has occurred throughout history, we recommend a classic book, Extraordinary Popular Delusions & Madness of Crowds. Written in 1841, and spiced with humor and some interesting archaic words, it chronicles human nature at some of its greediest and most illogical times, including the Tulipmania of 1634-1637 when a single "special" bulb sold for 8,000 pounds of wheat, 16,000 pounds of rye, four fat oxen, eight fat swine, 12 fat sheep, two hogsheads of wine, 1,000 gallons of beer, 500 gallons of butter, 1,000 pounds of cheese, a complete bed, a suit of clothes, and silver drinking cups.)