Don’t be afraid of the bear. It gives you the chance to pick successful stocks and beat the market.

Bear markets are an investor’s best friend. During large downtrends in the stock market, you have a better chance of gaining a large lead over index investors. If your goal is to outperform the market over the long term, bear markets play a crucial role.

Even if you beat a falling market, chances are you’re still losing money in absolute terms. But “beating the market” is relative, not absolute.

There is both theoretical and empirical support for a change of perspective. In theory, it would be easier to add value during a bear market because the time you spend in lower-risk stocks or other asset classes will cause your portfolio to lose less than the market itself. During bull markets, these lower-risk stocks or alternative investments typically lag behind the market.

This finding is supported by the data, at least as far as investment newsletters are concerned. The chart below shows the percentage of investment newsletters reviewed by my firm that have beaten the market in uptrends and downtrends since 1980. To determine the start and end dates of the major trend, I relied on a calendar of bull and bear markets maintained by Ned Davis Research.

Note that the percentage of newsletters that beat the market is far higher during bear markets – more than double – than during the average bull market. Also note that this bear market percentage is over 50%. If you relied solely on performance during bull markets to beat the market over the long term, your chances of success would be far less.

The same pattern of investment performance is evident in Warren Buffett, Chairman and CEO of Berkshire Hathaway BRK.A,

widely regarded as the most successful investor of that era. In the calendar years since 1965 (when Buffett acquired Berkshire) in which the S&P 500 SPX,
declined, Buffett’s annual alpha — the amount by which he outperformed the S&P 500 — averaged 23.3 percentage points. In contrast, Buffett’s alpha was 3.2 percentage points in calendar years when the S&P 500 rose.

If we focus on the period since 2000, Buffett’s annualized alpha was 21.4 percentage points in years when the S&P 500 declined, as opposed to minus 3.6 percentage points in years when the index rose. That means Buffett wouldn’t have beaten the market for the past 20+ years if there hadn’t been bear markets.

Stay the course

The goal of pointing out these stats is to strengthen your resolve while sticking to your plan during bear markets like the one we’re in right now. This can be difficult because in bear markets you will most likely lose money even if you beat the market yourself. So you will be tempted to question your strategy or even throw in the towel. There is a great irony in this temptation: if you give in, you would give up, while the odds of beating the market over the long term may improve.

The assumption of this advice is that you have an investment strategy. If not, contact a qualified financial planner and get one. Now more than ever you need to be disciplined with your money.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at

More: These 7 run-down value stocks are buys, says money manager who’s outperformed the S&P 500 for 30 years

Also read: The next big stock market rally could just be a bear dressed as a bull Don’t be afraid of the bear. It gives you the chance to pick successful stocks and beat the market.

Brian Lowry

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