Anatomy of the Bear by Russell Napier
One of my daughter’s favourite books so far in her short life has been “We’re going on a bear hunt”, a tale of how an incredibly irresponsible parent leads his family across treacherous deep rivers, through snowstorms and swamps in search of a bear, of whom part of the repetition so loved by toddlers is that “we’re not scared”.
It turns out that actually they are terrified of bears and have to make the same crazy journey in reverse, just this time at breakneck speed with a bear, erm, bearing down on them.
The lack of planning and preparation for both the journey and the panic induced when actually confronted with a bear could have been avoided had the family read Russell Napier’s book. Not only does it analyse the four most vicious bears in the history of Wall Street but gives you firm pointers as to how to spot them, what they all had in common, and what to do when confronted by one.
Russell Napier is a historian and Professor who has used his ability to analyse the stock market with the most complete and reliable data in history – the US equity market. Some of the data used to explain the backdrop to the 1921 bottom goes back to the 19th century; the Dow Jones Industrial Average (DJIA) was first published in 1896 (the New York Stock Exchange opened its doors in 1792).
The four great bear market bottoms in this book are defined by the returns over the following 40 years had an investor bought shares at the point the DJIA bottomed. Napier concentrates his research on what was happening at those times and more importantly what those great bottoms had in common, and whether the bear would be identifiable when it happens again. To do this he has read over 70,000 contemporary articles from the Wall Street Journal (first published in 1889) to gauge the levels of sentiment.
Taking the two months either side of the four great bear market bottoms as the time to study the WSJ is a great way to use contemporary commentary to illustrate what was going on in the markets and the general economy and what clues we can gain to inform us when the next great bear market bottom might be.
The problem with this method is that it fails to analyse all the times when similar commentary occurred during other periods of economic fluctuation that weren’t part of one of those great bottoms. How are we meant to know that there haven’t been other similar periods of commentary that could have been mistaken for a great bear market?
It is unrealistic to have expected Napier to analyse all the commentary in the WSJ in addition to the articles he’s already analysed as part of this book, and I suspect that the exercise was a worthy one in forming the conclusions he came to; but I find myself thinking about what is being published in the news today and wondering what Russell thinks of it. Is the news bad enough and being ignored enough to suggest we’re at the peak of a bull market?
What can’t be denied is the rigour of Napier’s research or his ability to forecast – the prefaces of the three previous editions correctly predicted the direction of the markets over the next few years, more or less. This latest preface describes why there will be an imminent dramatic decline in US equities and how investors can use the lessons from history to spot the bear at the bottom of the market and benefit from it.
Is the bottom of the bear market that started in 2000 still to be reached? Or will history show it to be in 2009? Either way, read this book to find out how to spot a bear and know what to do once you have got close enough to tickle its shiny wet nose.
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