Frank Thoughts: Bear Markets
Frank Boland
January 12, 2023

As you might recall, we identify the period of 1955-1956 as the beginning of the modern investment era. Prior to that, stocks had yielded more than bonds as they were deemed inherently riskier. It was a belief that changed in the 1950s with the arrival of Jerry Tsai at Fidelity Investment Management. His mother, who had influenced him throughout his life, was a stockbroker in Shanghai, China. Tsai had gone to college here graduating from Boston University with an MBA.  Fidelity Capital Fund was launched in 1958 with Tsai as the manager. As the sophomoric phrase states, “The rest is history.”

But instant success for a portfolio manager will often bring failure when the bull market becomes an inevitable bear market. This is especially so if a portfolio manager does not have a sell discipline as is the case with Cathy Wood, of ARK Investment Management. To this day, few professionals have one. Jerry Tsai left Fidelity in 1965 hoping to raise $25 million with his new Manhattan Fund. Given the new public euphoria for growth stocks, he raised $247 million!  After two years of indifferent performance, the bear market of 1968-1969 struck declining 36%. The Manhattan Fund lost 90% of its assets!

That bear market made a lasting impression on another Fidelity manager Roland Grimm. Grimm had been the manager of Fidelity Trend Fund (another new growth fund) and a cohort of Tsai’s through the 1950s. As a result, he became passionate on the absolute necessity of having a sell discipline. This was because of what he called the “uniqueness of portfolio math.” A 50% decline in a stock meant it then had to go up 100% to break even! Something that was not likely to happen in a bear market.

To survive in a bear market, one must view it as a new opportunity. This means you accept it not only as inevitable but a definite necessity. Nothing that goes parabolic has permanence. In fact, businesses have life cycles much as we do. It’s not unlike when you were in high school and felt threatened by future Rhodes Scholars, so are corporations threaten by new business models. The function of a portfolio manager is to choose among existing stocks and adjust his/her portfolio to any new changes, while keeping those companies that are still competitive in the new more difficult environment.

Since the start of the modern era, there have been 10 – now 11 bear markets. They average – for whatever value – a decline of 35.6% over 391 trading days. The current bear market is now a year old. It bears a striking similarity to the secular bear market of 1973-1974. Inflation is out of hand as then and the Federal Reserve is driving interest rates higher. Also, the 70s bear market had a concept called the Nifty-Fifty; this one has had indexation (nifty 500?). Each had one sector dominating the S&P 500. In the 70s it was the energy sector while in this previous bull market it was technology.

Each sector hit a peak of 28% of the total value of the S&P 500. Of course, it was in different centuries with different economies. The problem for investors in a bear market is that few will adjust to the new reality. Many believe what worked previously will work again when the cause of the bear market fades. However, the cause of the current bear market is not just what it was in the 70s, rising interest rates. Specifically, FAANG, cloud and fintech stocks hit the peak of their life cycle due to the plethora of competition created by 0% interest rates.  There isn’t a Levi Straus or RH Macy’s in technology.

This reality is why “old” economy stocks are now doing better than the “new” economy ones. How else to explain why the new economy in Silicon Valley is laying off thousands of employees while the old economy is looking for millions of workers? One needs fewer employees; the other more.

-Francis Patrick Boland

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