The trouble with expressions like “bull market” and “bear market” is that they presuppose that we know where the market is go­ing next. The reality is that everyone is just as clue­less as they always are. Naturally it’s always at the point of maximum doom-mongery that the market starts its recovery, and it’s always at the point of maximum bullishness that you should watch out. But it’s only possible to see these inflection points with the benefit of hindsight.

In October 1974, for example, the Australian sharemarket had roughly halved in value in six months, and you’d have forgiven anyone for feeling a little bearish around the edges. But by the end of 1975, the market had recovered 50 per cent. So then you might have felt a bit bullish – and watched the market go sideways for the next three years.

So really there are no such things as bull markets or bear markets, there are just markets that have gone up a lot and markets that have gone down a lot. And it’s always impossible to say, until afterwards, how long the downward or upward lurches will continue for.

That said, the big downward moves do tend to be somewhat different in character to the big moves upwards. In particular, the downward moves tend to be characterised by difficult economic condi­tions (or at least the anticipation of them) and this can make the future very unpredictable. The long upward runs, on the other hand, tend to be characterised by benign conditions which can look as if they’ll go on forever (and they sometimes do continue for a very long time, as we’ve experienced recently).

On the whole, you’re probably better to invest when you’re getting a discount for uncertainty, rather than pay a premium for a cheery consensus. But that, of course, means accepting the uncer­tainty, which is easier said than done.

There are a couple of ways you can help yourself, though. The first is to keep a tighter than ever focus on your “circle of competence”. When the market is flying around it can be tempting to launch into stocks and sectors that have seen big falls, but if they’re not your normal investing fare and you don’t understand them fully, then don’t allow yourself to get sucked in.

The second trick is to focus on quality. The quality stocks often get marked down with the rest of the market, but the best of them can actually benefit from tough economic conditions. This paradox arises because the weaker companies have to switch their focus towards survival (and some may still fail), while the great companies have the strength to keep investing in their products, thereby stealing a march on the competition. What you’re looking for here are dominant companies with wide competitive “moats”, sound financial positions, and strong and flexible management teams. When the storm is over, not only are these companies more likely to appear on the other side, but there’s a good chance they’ll appear in better shape than they went in.

Finally, no matter how tempting it is, you should resist the temptation to borrow money to invest. Ben Graham, the “father of value investing”, geared up in 1930, in the aftermath of the 1929 crash, and piled in to strong, undervalued com­panies (as they would later prove to be), but the market didn’t care and marked them down anyway. By 1932, Graham’s investing partnership was down 70 per cent and he was close to ruin – and that’s after he managed to avoid the actual crash. The “Dean of Wall Street” didn’t borrow money to invest ever again 

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