Finance Look for opportunities beyond the recent past If you’re a student of stock market history, you’re probably well aware that one of the near-certainties of any bear market is that the high-flying stocks of the recent past come back down to Earth. Understandably, some investors view that as an outstanding opportunity to pick up shares on the cheap before those former market darlings return to their highs. It’s a good idea in theory, but a little more dangerous in practice. The fact is, the companies and investment strategies that did well during long bull markets are rarely the ones that continue to work well after the bear market rears its head. And it’s not really a big mystery as to why: the positive economic and business circumstances that often lead to outperformance during bull markets are usually the ones that change dramatically in bear markets. This dramatic change naturally leads to a re-evaluation of investor opinion, which can often lead to a stretch of underperformance, both during bear markets and in the years immediately following. We can see recent examples of this phenomenon in the so-called FAANG stocks (Facebook, Amazon, Apple, Netflix, Google) of today. Leading up to 2022, all of these stocks performed spectacularly well, but they’ve suffered since the start of the year. Meanwhile, sectors that were formerly out of favour (energy, for example) have been among the strongest recent performers. Meanwhile, fixed-income assets such as government bonds, GICs and similar investments that have been pooh-poohed for years are looking increasingly attractive as interest rates rise. Will the FAANGs and similar stocks that performed well during the last bull run reach their former highs again? They absolutely might – many of them remain excellent businesses with a long runway for future growth. But they’re not nearly the “slamdunk” that you might think, if all you’re paying attention to is how far they’ve fallen. If you’re an investor who enjoys doing research, has a strong stomach for volatility and has a whole lot of patience, then sure, you might find yourself some great bargains by taking a look at former market darlings. For the rest of us, however, it’s best to widen our search for opportunities beyond the recent past, and keep an eye out for businesses better situated to succeed in the new economic environment, rather than the one we just exited. Focus on long-term quality instead of short-term speculations During times of easy money when credit is cheap, the economy is expanding and venture capitalists are willing to throw money at a variety of high-risk, high-return startup businesses, investors with a strong stomach for risk can often find intriguing speculations that can pay off big-time. During a bear market, however, things change. The economic environment in which such speculations flourish can evaporate quickly. High-flying hedge funds and angel investors aren’t so quick to support crazy business ideas. And the increased sensitivity to risk that often accompanies a bear market can make it much more difficult for “hot stocks” to pay off. There’s a time for taking a flyer on a promising idea, and a time to stick to quality businesses. A bear market firmly belongs to the latter category. Unless you’re an active trader or an experienced investor with a penchant for risk, it’s probably best to view the bear market as an opportunity to build a long-term portfolio of quality businesses rather than a treasure hunt for short-term speculations that can make you a quick buck. Instead of focusing on hot stocks, identify businesses with a long-term competitive advantage –businesses that you’d be happy to hold for five, 10, 20 or even longer. Seek out companies that will survive and thrive no matter what the economic conditions. Build a foundation of investment income that will see you through your golden years. Identify opportunities in quality businesses that will grow over time, rather than risking it all on a crazy idea that may pay off, or may end up costing you everything. Above all, remember this: if you’re tempted to speculate, do so rationally. Make sure to do your research. Keep the total amount which you invest in such opportunities small. Have a sell target in mind, and establish a limit to the losses which you’re willing to accept if the idea just doesn’t work out. CSANews | WINTER 2022 | 41
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