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When Bears Move In, They Stay Awhile

October 28, 1987|JAMES FLANIGAN

So we're in a bear market--so what? At a time when the dominant trend of stock prices is down, is there anything an ordinary investor should know except sell?

Well, a few things, such as that bear markets don't end quickly but are notorious for sending false signals to make investors feel that they do. "A bear market is a series of misjudgments as to duration," says a pension fund manager. As has already happened several times since the Oct. 19 crash, stock prices shoot up again in sudden rallies, convincing some investors that the worst is over. Then, when the suckers buy once more, stock prices resume their decline.

It sounds like something ordinary people should stay away from. But that's no longer easy, as individuals more and more find themselves called upon to make decisions on pension or trust fund investments. Like it or not, the stock market touches more lives these days than it did in the past.

Age Makes a Difference

So what should you think at the outset of the bear market? That if you're in the late stage of your career, especially if you're looking for retirement money in the next five years, reduce your exposure to the stock market. But if you're young, regular investment in the stock market makes sense, says Philip Roberts, senior vice president for investments at Aetna Life & Casualty Co., which manages $60 billion in pension and annuity funds. Although it wasn't true in the terrible 1930s, over the last 40 years, at least, the bias of stock prices has been up.

There's no rush to make decisions, however. This bear market has just begun, and even the professionals are still sorting things out. Many investors for pensions and other large accounts say they reduced common stock investments from over 70% of their portfolios to less than 50% before the crash. These days, aside from trading on the market's sizable daily swings, they are investing in Treasury bills and bonds, in commercial real estate and in the type of companies that tend to do better in bear markets--property and casualty insurance companies and electric utilities.

Individual investors, meanwhile, appear to be using any price upswings as opportunities to sell, although brokers such as St. Louis-based Edward D. Jones & Co. are advising their largely individual clientele not to be too quick to do so. "We think the market is ignoring real value," says managing partner John Bachmann.

As if confirming that thought, IBM announced Tuesday that it would buy back $1 billion worth of its stock, more than 8 million of its 604 million shares outstanding. IBM was declaring, as did the 100 or so companies that announced stock buybacks last week, that it saw value in its stock at these levels.

When Caution Counts

Long-term value, that is. IBM, Citicorp, Ford and other big companies aren't buying today in hopes of a rise in price tomorrow. It's just that they have been through bear markets before and don't believe they will lose in the long run by buying their stock today.

How long is long--how long do bear markets generally last? About two years is the average duration of the nine bear markets since 1929. But averages can be misleading--remember the fellow who drowned when he stepped in 10 feet of water in a river that was five feet deep on average. Roger Ibbotson, of Chicago's Ibbotson Associates, which publishes research on market behavior, points out that it took investors 42 months to recover their losses from the last major bear market in 1973-74.

So how do you play the bear market? Once again, if you're likely to need money in the next few years, get out. Bear markets don't merely take stocks down to reasonable values, they make stocks cheap. The 1973 bear market reduced IBM's value by 60%. By contrast, certificates of deposit involve no risk to principal and pay attractive interest rates--especially on one-year or longer terms.

If you're young, play like IBM and the other big companies, buying with an eye to future potential. In the two years after the last major bear market ended, IBM rose 90% from its low.

Meanwhile, try not to go broke while biding your time. Investment professionals use different strategies in bear markets, some that may not be for everybody but are interesting nonetheless. Metropolitan Life Insurance Co., for example, has increased investments in commercial real estate for discretionary accounts among the $55 billion it manages. When stocks and bonds are in trouble, explains Senior Vice President Harvey M. Young, real estate tends to do better.

Others invest in electric utilities, because they pay high dividends and offer the possibility of capital appreciation, and insurance companies. Why insurance? Because past premium reserves have built up substantial gains in many companies' bond and fixed-income investment portfolios, explains Alice Cornish of Conning & Co., a Hartford, Conn.-based research firm. And that assures them cash flow at a time when it is not so certain for industrial companies.

What else can one say about bear markets? That, yes, it is possible to have one without a recession. It happened in 1962, when stocks fell but the economy didn't. Some investment professionals are recalling that these days, hoping against hope that this bear market will be similarly sharp but short. A happy thought, but don't forget that bear markets specialize in false signals.

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