Bull markets reward risk-taking, but when the bear puts out honey, he is usually laying a trap: “In recent years, U.S. investors have felt that they must be playing the market—even when the risks are high,” Marc Faber observed. “They learned to think that they should invest like George Soros—but the average investor is not George Soros. When I play tennis, I don’t try to play like Agassi,” Faber added. “I have to play a different game. Agassi can play to win. I have to play a game where I don’t make any mistakes.” In a bear market, this is what is most important: not making mistakes. The goal is to conserve capital. When a long bear market finally ends, those with cash will find bargains galore.
In each case, investors were following the rule that they learned in a bull market: “The trend is your friend.” But in a bear market, “you have a whole different rule book,” Ralph Wanger observed. “In a straight-up growth market, your rule is to be 100 percent in equities all the time. Buy strength. Disregard risk. Only look at the income statement. And all stories are true because we want them to be true. It’s like the nice guy you met in the bar telling you he loves you truly—and he does. “In the volatile bear market that tends to follow an exponential growth market, many of these rules invert,” said Wanger, speaking from experience. “You don’t buy strength; you sell strength. You don’t look at the income statement, you look at the balance sheet [which shows a company’s debts]. All stories are false. It turns out that the guy in the bar is a married orthodontist from Connecticut.”