ETF Investing: Value And The Bear Market

When markets begin to slide, or even slip into bear market territory, you will find many ‘experts’ in the media and on TV announcing a variety of investments deemed to be a good bargain at that particular time. It’s like everybody has a compulsive obsession with the need of having to be invested in something at all times.

The lesson learned from the last bear market (2000 – 2002) should be that it is perfectly OK to stand aside and be in cash while others get involved trying to catch the proverbial knife by picking investments on the way down.

Al Thomas had some good advice in his last newsletter about bear markets and evaluations. Here it goes:

“In a bull market it doesn’t make any difference what those secret formulas are because the stock would have gone up anyway. Again those great formulas will not save the best “undervalued” stock when the bear chews on equities. When the tide goes out all the boats go down.

There are books written with hundreds of pages explaining many methods such as: Constant Growth Formula, Cash Flow, Income Valuation, Discounted Cash Flow, etc, etc. Almost all are based on fundamentals from the corporate balance sheets. They all work – SOME of the time.

What brokers do not seem to understand is that no matter how “good” a valuation is by any method chosen the stock will go down when a bear market is occurring. Brokers call their clients to say what a good buy XYZ is and then watch it lose money month after month. Here is a basic
truth – there is no “good value” during a bear market. The smart investor will not buy until the bear has run its course.

The best value during a bear market is a money market account. The account won’t make much money, but it won’t lose 20, 30, 40% or more. Cash is the best value.

Investors are told they must be invested at all times. This not true. There are times when no stock position will make more money than holding cash. Few brokers know or understand this concept and their company does not want clients in money market accounts as they don’t make any money on them. Truly a brokerage company is not there to help you make money. They are there to make money off you.

The first rule of valuation is not to lose money so smart investors should not be mesmerized by mysterious valuation formulas. Cash is king during a bear market.”

Al’s observations go along with my experiences. I especially can’t stand the financial reality TV experts dispensing useless advice to justify their existence. They represent the perfect example of Frank Lloyd Wright’s definition of an expert: “An expert is someone who has stopped thinking because he knows.”

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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