Bulls, Bears and other dangers

Derek Smith reflects on the dangers of bulls

Author: Derek Smith

Posted on: 15 May 2020

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We were amused to read of ‘Ron’, the Bull with an itch, who recently managed to knock out the power supply to 700 homes in South Lanarkshire. Ron scratched so vigorously against an electricity transformer in a corner of his field that he dislodged it and ‘bang’ went the electricity supply.

We all knew that bulls could be dangerous but perhaps not in such an obscure fashion.

Investment commentators are prone to referring to Bulls – and Bears – when sharing their wisdom on current and future prospects for stock markets. This on the assumption that everyone knows what they mean when referring to ‘bulls and bears’.

Investment language defines a ‘Bull market’ as one where sentiment is generally positive and stocks increase in value over a prolonged period. Conversely, a ‘Bear market’ is where the opposite happens – sentiment is negative and continuing falls in value prevail.2

The chart included depicts the various Bull and Bear markets experienced in the UK stock market since 1926. Happily, the Bulls outnumber the Bears and have a longer lifespan.

Timeline Chart – 2020 UK B&B.pdf

Since 1926 there have been 11 Bull markets with an average lifespan of 7 years whereas there were 9 Bear markets but their average lifespan was a rather dismal 1.75 years.

Good news then for investors in the UK – if you accept that past history can be used as a predictor of future events – you are likely to experience longer and more regular ‘happy’ periods with positive returns than ‘unhappy’ periods with negative returns (otherwise known as losses).

The news is even better if we consider the returns3 investors might have participated in during the relative periods:

Since 1926 there have been 11 Bull markets with an average lifespan of 7 years whereas there were 9 Bear markets but their average lifespan was a rather dismal 1.75 years.

Good news then for investors in the UK – if you accept that past history can be used as a predictor of future events – you are likely to experience longer and more regular ‘happy’ periods with positive returns than ‘unhappy’ periods with negative returns (otherwise known as losses).

The news is even better if we consider the returns investors might have participated in during the relative periods:

  • Bull markets delivered an average return of over 500%
  • Bear markets resulted in average losses of just over 36%

Adding all of that up together would have resulted in the conversion of £1 000 invested in 1926 to a very respectable £9 100 000 by the end of 2019. Cash would have delivered £85 000 over the same period.

A logical investor seeking to maximise returns would therefore simply invest during Bull market periods and avoid the Bears. Very simple but almost impossible as, despite a huge amount of time and effort being invested in predicting when these periods begin and end, no one has been able to do so in any kind of consistent and reliable manner.

Private investors tend to invest most in the period leading up to the end of a Bull market and sell out as the Bear market nears its end – in other words buying high and selling low, an almost guaranteed method of minimising returns.

Given the impossibility of consistently predicting market rises and falls what strategy should we employ?

For long term investors the most consistently successful strategy is to spend as much time in the market as possible – a simple buy and hold strategy. This can be uncomfortable at times, sitting tight and resisting the temptation to ‘do something’ when markets drop in value is never easy.

However if you are not in the market when prices rebound then you are likely to achieve sub-optimal returns – a bit like turning up late at the football match and missing the early goals. If you’re not in your seat at kick off then you might miss some of the best action!

Unlike Ron, investors need to resist the urge to ‘scratch that itch’, they should stay invested and avoid the danger of unintended consequences.


1 https://www.bbc.co.uk/news/uk-scotland-glasgow-west-52591605

2 the most common ‘formal’ definition of a bull market is a situation in which stock prices rise by 20% from recent lows amid widespread market optimism and investor confidence; a bear market is a situation where stock prices fall by 20% or more from recent highs amid widespread pessimism and negative investor sentiment

3 All figures are before expenses, transaction costs and taxes. Returns are based on theoretical portfolios rebalanced annually, dividends reinvested.

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