"We are currently in the first few innings of a secular bear market" In the introduction to Bull's Eye Investing (Wiley, 2004) the author, John Mauldin, states: "We are currently in the first few innings of a secular bear market." Mauldin defines a secular bear market "as a long period of years or even decades [historically as short as eight years or as long as 17] when stock prices are either flat or falling (think Japan today...)". Expect below average returns in the years ahead.
A bear market does not necessarily mean a market collapse. Quite often it's a sideways event with opportunities, from time to time, to purchase stocks on higher yields and occasions to sell when prices rise. "In the seventeen years from the end of 1964 to the end of 1981". John Mauldin says, " the Dow Jones Industrial Average gained exactly one tenth of 1 percent".
We have to know we are in a bear market because the investing strategy is different. I liked the way Mauldin described the difference in Bull's Eye Investing. "The focus of an investor in a secular bull market is relative returns...by how much am I beating an index. In a secular bear market, in contrast, the focus is on absolute returns: the benchmark is a money market fund. Success is measured in terms of how much you make above treasury bills. In secular bear markets, success is all about controlling risk and carefully and methodically compounding your assets." Don't despair about a secular bear market: according to Mauldin, "50 percent of the years in a secular bear the market goes up, and often by 20 percent or more" 221

VALUE INVESTING - "The essence of Bull's Eye Investing is quite simple. Target your investments to where the market is going, not to where it has been. Steady, stable, sure. Buying something that is undervalued, perhaps grossly undervalued, and wait for the value to be seen by others is the way to real returns. Buying what everyone else is buying, after is has already risen in value, is why most investors simple do poorly." 262
"Throughout this book, I show how value wins time and time again. We have also seen numerous studies that show that buying deep value for the long term is a strategy that works in all type of markets. It is the only thing that works for stocks in a secular bear market cycle." 262

DIVIDEND INVESTING - John Mauldin does not seem to be a dividend investing person and this book is certainly not about dividend investing. However, he does recognize the value of dividends as evidenced by these dandy statements.
128 "look for old economy companies with solid track records of growing dividends and low value ratios, and be patient."
230 "buying value stocks is an extremely effective way to invest, especially in difficult times"
R = Dy + G + P / D
"The return (R) you get from an equity investment is the sum of the dividend yield (Dy), dividend growth (G), and any change (the Greek letter delta was supposed to appear before the P/D) in the valuation of the dividends that occurs over the holding period" 256
On page 17 of Bull's Eye Investing there is a chart showing the growth of dividends over the last 130 years: "a smooth line with a gradually increasing slope"
"Better yet is a stock that has a tendency to increase dividends so that over time the actual stock price is likely to rise. Even better is a stock that pays good dividend and is also undervalued." 271

link back to front page index

GROWTH STOCKS - I just love the way Mauldin phrased this thought: "the issue with growth stocks comes from speculation over their future growth, since they are already expensive". 257 That's the story with growth stocks exactly. The growth has already been recognized. If you buy them you are betting the growth will continue. It's that simple.
This thought on page 119 about growth stocks is good too. "investors should be wary of stocks that trade at very high multiples. Very few firms are able to live up to the high hopes for consistent growth that are built into such stellar valuations." The author quotes Montier's book Behaviourial Finance on this topic of growth stocks too. "The key skill in growth investing is avoiding the losers rather than picking the winners."

Test
24. Average annual real corporate profit: ___ % (real means adjusted for inflation)
29 a. Average annual real rate of return from stocks over the last 200 years: ___%
b. What portion of this return came from dividends?
29. Average annual real return in a bear market: ___% (answers at bottom of the page)

I quickly read through Chapter 9 on under funding of state pension plans (there will be problems), Chapter 11 on demography and Chapter 12 on the American dollar. "Of all the trends discussed in the book, the drop in the dollar is the one most set in stone."176 Mauldin continues: "gold, that barbarous relic, will be the beneficiary of a depreciating dollar." 176
Chapter 14 about the Federal Reserve's Greenspan and Bernanke (humans run the Fed) and Chapter 15 about why investors fail. (Among the reasons why investors fail: they chase performance; are irrational, in fact predictable irrational 212; can't take a loss and are too emotional.) both contained engaging ideas.
Chapter 10 contains some excellent thoughts about increasing retirement age: as returns on investments decline, boomers will have to save more and/or work longer. 136 They will not, on average, be able to retire at age 65.

INDEX INVESTING - In a bear market you don't invest in index funds. Mauldin makes this quite clear: "index funds: get out of them. Use any rally as an exit ramp." 127 "When P/Es are dropping, stock market investing is tricky; index investing is an exercise in futility." 63
STOCK BUYBACKS - Investors get excited when companies announce stock buybacks. Maudlin points out that they shouldn't. 125 "Many investors believed that stock buybacks would permit earnings to grow faster than GDP. The important metric is not the volume of buybacks, however, but net buybacks-stock buybacks less new share issuance, whether in existing enterprises or through IPOs." Maudlin goes into some of the misconceptions surrounding buybacks in Chapter 8. For instance, "when looking at the entire universe of companies you find that new share issuance almost always exceeds stock buybacks, by around 2 percent a year". 121
P/E RATIO - "What happens in secular bears is that earnings grow and P/E ratios drop. But it does not happen all at once. It takes time." 106 "What we are saying is that P/E ratios are going lower-potentially much lower than current ratios. This can happen by either than market moving sidewards for a long period of time as earnings growth catches up or a drop in prices to where P/E ratios are consistent with a secular bear market bottom." 94
"There has never been a time in history when P/E ratios have been in the range they were in 1999 or the end of 2003 that 10 years later investors in the broad market have outperformed a money market fund. None. 223 "P/E ratios always revert to the historical mean, which is about 15." 23
HEDGE FUNDS - Even though some 100 pages of Bull's Eye Investing are devoted to hedge funds, the book is still worth buying. (That statement tells you what I think of hedge funds: not suitable for the average investors.) Maudlin says this in Chapter 21: "the basic hedge fund investment vehicle for most investors: the fund of hedge funds".
FORECASTING - "the brightest minds on Wall Street are verifiably (as a group) really, really, really bad at estimating the future potential earnings and growth of stocks" 120
"Yet what is the basis for most stock analysts' predictions? Past performance and the optimistic projections of a management that gets compensated with stock options. What CEO would tell you is stocks is overpriced? His staff and board would kill him, as their options will be worthless." 207

Mauldin refers to the work of the right people (Jeremy Grantham, Peter Bernstein, Martin Barner and Richard Russell, for instance) and takes quotations and data from the right studies ( Robert Shiller, David Dreman and Robert Arnot, for instance).
Some other useful reminders I culled from Bull's Eye Investing:
"Keep in mind that is takes a 100 gain to offset a 50 percent loss." 65 Avoid losers
"When you invest makes a huge difference as to your long-term returns." 66
"We should expect a falling dollar [American] for the next few years." 50
"Let's summerize: many corporations are in a bind. They have overstated earnings because they assume that the stock market will grow faster than is realistic in the current environment. This means instead of earning from their pension funds, they have pension liabilities for which they have not accounted." 114
"Since it is likely that the accounting industry will soon require firms to deduct options expenses, this is going to seriously impact corporate strategy." 108

TEST ANSWERS: 24: 6% corporate profit; 29(a) 6.8% return; 29(b) 2/3s from dividends; 29: real return in a bear market is 0.3%
www.johnmauldin.com