Bearish works for me

Are we in a 'bear market'?  The media is beginning to adopt the term, almost with a sense of relief that they are 'allowed' at last to use it.  The May edition of Financial Planning magazine is entitled "International Investing: Is The Party Over?".  The May edition of the US journal On Wall Street runs the strapline "The White Knuckle Ride".

Certainly, investors who had the misfortune to buy the FTSE 100 in August 2001 would currently see their investment back at par, after around four years in negative territory, followed by nearly three in uncertain, volatile profitability.  Those who are taught to buy the Index, and then hold regardless, may be cursing that particular model.

So, we can perhaps expect a positive deluge of negative newspaper headlines.  A search for the word 'recession' on the Daily Telegraph website yields spectacular results.  A search for 'bear market' is less helpful, yielding articles on Chinese Bile Farms!

All of which might tempt the unwary adviser to become a tad bearish about business prospects, but I (alarmingly) remain consistently upbeat.  Why is this?  I offer the following homespun thoughts:

1. US researchers have found that the real truth about investment markets is generally in inverse proportion to the degree and emphasis of media coverage.  Their optimism is invariably unfounded, and their pessimism usually heralds some of the best investment opportunities in years.  Whereas intermediaries are accountable for their advice, newspaper editors appear not to be.
2. In recent years, UK investors have increasingly emphasised cash as the primary medium for their savings.  There is a kind of double-whammy going on: the UK Savings Ratio has dropped from a high of 14% in 1980 to around 3.5% in 2005.  Of those who are saving, far more are staying in cash (helped, for instance, by the relaxation in ISA rules).  In addition, the newer breeds of defined contribution pension schemes offer greater investor choice - and investors are choosing cash.  This means that there should be a lot of cash slopping around in the retail market, which needs our help to invest.
3. There are collective investments with a track-record for performing well in a bear market.
4. If we have any awareness of investor or market-maker strategy, this ought to lead us towards a contrarian approach.  Research by Robert R Prechter indicates that professional stockbroking strategists tend to adopt a heavier weighting in stocks just before a market falls, and a lighter weighting just before it advances.  This is 'normal' behaviour and tends to contribute towards the markets highs and lows.  This means that such advice is generally not profitable for consumers - for intermediaries, it therefore helps to observe what other professionals are recommending and perhaps adopt a contrarian approach.  For what it's worth, Prechter's observations also hold true for pension fund managers!
5. I am going to avoid the obvious pitfall of trying to identify the best point at which to enter a declining market.  Prof. Simon Keane (2000) published the results of his own research which concluded that the only methodology for anticipating the phases of a bear market was that of hindsight.  Which doesn't help us much.  Other pundits like Prechter, Harding and, I suspect, J K Galbraith would suggest that an understanding of history does at least help.  Certainly, logic would dictate that when other investors are exiting the market in droves then there are good-quality stocks to be picked up at knock-down prices.  There are some good unit-trust and investment trust managers who play that game.
6. Customers - ordinary people with the usual financial needs - need careful, informed advice.  They won't get it from newspapers.  They won't get it from the banks.  They certainly won't get it from the regulator.  You're the best chance they've got.