5 Key Lessons from Past Bear Markets


We are now in a real bear market. How can we best deal with this? Asset manager Capital Group asked five of its portfolio managers to share key lessons from past bear markets.

These are the lessons they have learned with a combined 171 years of experience:

1. Avoid winners of last cycle

Lisa Thompson“As I expect higher inflation, I avoid a lot of high-growth, especially US, companies that were the winners of the previous cycle. Instead, I look for opportunities in lower-cost companies that generate strong cash flow.”

“Think of it as ‘revenge of the geeks’. Instead of the hipsters of the past decade – the glitzy tech and media companies – I prefer the unpopular types in the sectors that suffer from the low cost of capital, poor capital allocation and unfavorable regulation.”

2. Separate the wheat from the chaff

Don O’Neal: “Choosing the best companies with the best growth stories seemed like a good approach over the past 10 years. But in the future, it will be harder to generate good returns, and the factors that determine returns will most likely change. E.g. you can no longer buy and hold the fastest growing ones without looking at profits, and so we are now seeing a welcome renewed focus on fundamentals.”

“For me, it’s time to hold only the investments you are most convinced of. So separate the wheat from the chaff. For example, it could be growth companies in semiconductors, cloud services or search. But more value-oriented companies like insurance companies or energy companies are also possible.”

3. Replace the intangible with the tangible

Carl Kawaja: “We all see how fast the electric car is gaining ground, but many people underestimate how much nickel and copper must be used for the batteries. Another example of a tangible investment is iron ore, a key ingredient in steel. No other material is so strong , cheap, light and flexible and so easily deformable and transportable. This material is the basis of enormous progress in the world.”

“Iron ore can be found all over the world, so in theory many people could produce steel. But there are really only two places where it can be mined profitably – Brazil and Australia. Brazilian iron ore is particularly suitable for blending with other types because it requires lower production costs also to make stronger steel.”

“It’s hard to find that quality anywhere else. Silicon Valley isn’t going to suddenly turn the iron ore market upside down, and brilliant scientists in Switzerland aren’t going to be so quick to discover another way to produce it. Naturally, the market moves in cycles . , but I am convinced that iron ore production will still be important in 50 years.”

4. Choose supertankers

Jody Johnson: “In light of the great uncertainty, I focus primarily on the ‘super tanks’: dominant companies that generate solid cash flow, have a strong competitive position and can finance their own growth. I am more cautious about what I moonshot would call – higher risk, higher return companies that are more volatile.”

“So I look for companies with reasonable, understandable valuations based on short-term earnings and cash flows. Think health resource providers or insurance companies that can benefit from rising interest rates and are not too sensitive to the state of the market economy. .”

5. Bear markets can be your friend

Steve Watson: “In my career I have experienced 21 market shocks, including the collapse of the Soviet Union, the bursting of the technology bubble, the financial crisis and now corona. I mention these events to emphasize that the markets have a crisis. It is only a matter of time”.

“An investor can benefit from buying in the early stages of market recovery, when pessimism gives way to optimism. So bear markets can be the investor’s friend, provided he remains calm, patient and focused on the long term.”

“Despite my preference for value stocks, I also remain a strong believer in the resilience of the tech sector. Timing of entry remains important to me. Furthermore, I have long believed that dividends are the most important way a company transfers value to its investors. In my view, the stability that dividend payers provide during market turmoil is more important than ever.”

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