Why you should love a bear market
Most investors fear “bear markets,” where stocks fall or stagnate. But many of us should be hoping for them. That may sound illogical, but if you’re continually plunking money into the stock market for the next few decades, a flat or falling market in the near future is a good thing. Superinvestor Warren Buffett once explained:
“If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.”
Over the long run, you’re simply better off buying shares of great companies at fair or depressed prices than at higher prices. Why hope to buy Wal-Mart shares at $60 and then $70, when you’d do better buying at $50 and $40? If you plan to buy milk for the next 25 years, 10 years of falling milk prices would be welcome, right? (Unless you run a dairy.)
The stock market is a place to invest money methodically, adding to your savings with the knowledge that over the long run, the patient investor has usually been rewarded. Too often, it’s instead portrayed as a get-rich-quick vehicle. The media presents a momentary drop in the stock market as unambiguously bad, and the possibility of a longer drop as reason to panic.
A bear market isn’t good for everybody, though. For those in or nearing retirement, it’s logical to prefer a bull market over the next five, 10 and 15 years.
Ask the Fool
Q: What’s a “burn rate”? — P.V., Escondido, Calif.
A: A company’s burn rate refers to how quickly it’s burning through cash. This isn’t that much of an issue for large, established companies, but with small and quickly growing enterprises, it’s valuable to look at their burn rate. The number to examine is free cash flow, which is income from operations, less capital expenditures.
For example, imagine that in its most recent quarterly report, the Rubber Chicken Catering Co. (ticker: CHEWY) reported negative $20 million in free cash flow, as its cash balance fell to $80 million from $100 million in the previous quarter.
Q: How can I find the highest rates for certificates of deposit (CDs) online? — D.S., Jackson, Miss.
A: Just click over to www.bankrate.com/brm/rate /high_home.asp and you’ll be able to find, among other things, some of the best interest rate deals for CDs, mortgages, auto loans and personal loans. Last time we checked, you could earn 4.71 percent (in annual percentage yield) on a 2.5-year CD from M&T Bank in Oakfield, N.Y. You don’t have to live in the state or city where you invest in a CD, so don’t think you’re stuck accepting your neighborhood bank’s 3.6 percent deal. A little research could pay off. Learn more about short-term savings at www.fool.com/savings/savings.htm.
My dumbest investment
This is definitely in the running for my dumbest investment decision. Many years ago, I was thinking about buying Microsoft. I had done my research, and was all set to buy it when I heard a news report that said that Bill Gates was worth $8 billion. At the time, that made him either the richest or second-richest person in the world. I thought, wait a minute. By the time I make any real money, Bill will be worth around $25 billion. At that time, $25 billion was so totally outlandish that I didn’t buy the stock. So the lesson is: It doesn’t matter how much money somebody made (or lost) yesterday. The only thing that matters is how much can be made in the future. — Gary Olmstead, Ventura Calif.
The Fool Responds: That’s an excellent point, true of stocks, as well.
A stock may have doubled in the past year, but that doesn’t mean it won’t reward you over the long haul.