The Only Three Questions That Still Count: Investing By Knowing What Others Don't, 2nd Edition

Some Basic Bear Rules

Why 18 months, you ask? While bull market durations vary considerably, most bear markets last about a year to 18 months on the outside. Very few in modern history last fully two years or longer. If you’re making a defensive move, you probably shouldn’t bet on one lasting so long. The longer a bear market runs, the more likely you’re waiting too long to get back in. The 2000 to 2002 bear market was unusual—longer in duration than the 2008 bear market! The 2008 bear market was huge in terms of magnitude, though the 2000 to 2002 one had big magnitude, too. That we had two big bear markets in a row likely make many think bear markets are normally that long or steep—an example of recency bias and a cognitive error. If you are betting the next bear market lasts much more than 18 months, you are basing that bet on a historical outlier—and you must have strong, fundamental reasons not based on fear or emotions backing up that view. Then, too, if you remain bearish for longer than that, you may miss out on the rocket-like ride that is almost always the beginning of the next bull run. Missing that can be very costly.

Further, if you get out successfully and time proves your success, your Stone Age brain may fear exposing you to losses—which could keep you out until after that initial next bull market rocket ride. Staying may feel more comfortable—it lets you feel right longer, particularly if you convince yourself the start of the rocket ride isn’t real. Your brain ...