Money: For most of us, bear markets have to be endured if the fruits of the bull market beyond are to be enjoyed. In other words, no pain, no gain

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The Independent Online
We all know - or should do by now - that we are living through one of the great bull markets of this century. But how abnormal is it, and what are the implications for investors?

One man who has dared to try and put the current bull market in its long- term global context is Dr Sandy Nairn, who runs the Edinburgh office of the Templeton fund management group. By analysing the performance of the Morgan Stanley world stock market index from 1954 until the present, he has produced some fascinating new data about the length and magnitude of market cycles in the post-war period.

His definition of a bear market is one in which the market indices fall by 15 per cent or more, measured from peak to trough. On that basis, we have lived through eight bull markets and seven bear runs in the last 42 years.

Taking the period as a whole, the average length of a bull market over the period has been just under four years; the average bear market about one quarter as long. Similarly, the bull markets on average have produced a real (post-inflation) return to investors of 103 per cent and the bear phases a loss of 26 per cent.

By and large, bull markets run four times as long as bear markets and double investors' money in real terms. The succeeding bear market tends to last a year and costs investors a quarter of their wealth in real terms. The averages of course conceal some striking differences in performance. The most savage bear market was that between 1973 and 1974, when world stock markets lost 48 per cent in real terms. The strongest bull market was the five-year one that ran from mid-1982 to the crash of 1987. It generated an average real return of 31.5 per cent per annum.

Where does that leave the present bull market? According to Dr Nairn, the current upward trend in the stock market has now run for more than six years, since October, 1990.

That makes it either the longest or the second longest bull market since the war, depending on how precisely you measure the stock market rally in the mid 1950s, when the data is less reliable. What is not in doubt is that if the world index carries on climbing until the end of 1997, it will have earned for sure the accolade of being the longest global bull market of the post-war period.

But it will still not be the most dramatic bull market we have known. The cumulative real return since 1990 - just over 80 per cent - still lags that recorded in the market booms of the mid-1950s and the mid-1980s (134 per cent and 302 per cent respectively). Just as interesting is the fact that, while the 1987 crash is still etched in most investors' minds as the worst setback in recent memory, hindsight places it as more of a concentrated correction to a previously overheated market than a climactic break with the long-term trend.

Dr Nairn is careful to point out that history provides no guarantee to the future, at least in any mechanistic sense. But for anyone who believes that markets are rational in the long run (as Templeton and many other so-called value investors do), the implication has to be that a bear market will arrive in due course - and probably sooner rather than later, if the length of the current bull phase is anything to go by. We just don't know when. A gloomy prospect? Not necessarily.

Anyone who has a strong balance sheet and sufficient spare funds to pick up the bargains that the bear market will inevitably throw up should be well placed to benefit from it. Doing just that was how Sir John Templeton made his millions in a 40 year investment career.

Dr Nairn puts it: "Every bear market has always been followed by a bull market which has been more rewarding than the bear market which preceded it."

What he means is that, for anyone lacking the skill or luck to call the turns in the market as they happen, bear markets have to be endured if the fruits of the bull market beyond are to be enjoyed.

In the 42-year period looked at by Dr Nairn, holding cash would have produced only a tenth of the gain in wealth available from being invested in shares throughout.

But if you had invested a regular sum in Templeton's main growth fund every month since 1954, there has not been one five year period when the stock market would not have produced an overall positive real return. That is the case for patient, long-term equity investment.

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