Have you ever wondered why when the stock market is up, it is said that the market is “bullish” whereas the contrary is said to be “bearish”? The terms “bull” and “bear” are thought to be derived from the way each animal attacks its opponents. A bull will thrust its horns up into the air while a bear will swipe down on its adversaries. These innate actions were then related metaphorically to the stock market movements. Even though a bull thrusting its opponent high into the air might sound frightening, its quick, swift actions are typically not translated to…
The terms “bull” and “bear” are thought to be derived from the way each animal attacks its opponents. A bull will thrust its horns up into the air while a bear will swipe down on its adversaries. These innate actions were then related metaphorically to the stock market movements.
Even though a bull thrusting its opponent high into the air might sound frightening, its quick, swift actions are typically not translated to the stock market. A bull market usually takes a long time to form, usually many months and years. However, when a bear strikes, the markets can tumble down fast and furious, sometimes within weeks, perhaps even erasing past gains in a very short period of time.
To find out the reason why this is so, we have to look at two human emotions driving the stock market all the time – greed and fear. Greed takes some time to form in investors. When the stock market is slowly rising, more people talk about it and come on board slowly till the market peaks. However, when fear strikes, things get really messy as investors sell in panic, causing tumultuous plunges in the stock market, almost in a blink of an eye. As selling continues, pessimism grows, creating more price plunges.
In the chart below, we can see clearly the various time frames and the duration for the Straits Times Index (SGX: ^STI) to rise and to fall to almost the same levels:
(Source: Yahoo! Finance)
The first down arrow indicates the Asian Financial Crisis in 1997. The second down arrow indicates the Dot Com Bubble in 2000. The third down arrow indicates the Sub-Prime crisis in 2008/2009. The last down arrow indicates the US sovereign debt downgrade. Except for the second down arrow (the duration of downtrend is slightly longer than the uptrend, probably due to quick recovery from the Asian Financial Crisis), it can be seen that bear markets tend to happen quickly.
Taking the current downtrend as an example, within 3 weeks, the STI hit a 6-month low whereas it took 6 months to hit the 5-year high of 3454 points seen on 22nd May 2013.
What can investors do to take advantage of such market irrationalities? Warren Buffett once quipped that we have to be greedy when others are fearful. When the bear strikes down hard, we must be greedy enough to purchase companies that we like. Companies such as Super Group (SGX: S10), Fraser and Neave Limited (SGX: F99) and Jardine Cycle & Carriage Limited (SGX: C07) have been some of the top few gainers in the past five years since hitting lows during the 2009 crisis. By being fearful and sitting on the sidelines, we would have missed out on these gains.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Sudhan doesn’t own shares in any companies mentioned.