Ask Colin

The Dow consolidated for about 20 years below 1000. It then rose for about 20 years in a bull market. Everyone is awaiting a bear market ending to jump in and buy. But isn't it more likely we will have to wait 10 to 15 years for the next bull market?

This is an interesting question and poses one of the great imponderables in the present situation. I don't know that I have the answer. In fact, I don't think anyone can know the future. However, here are a few thoughts:

1. Your proposition is not scientific in the sense that it falls into the logic trap known as the fallacy of small numbers. This says that just because something has happened once or twice before, it does not follow that there is a pattern. There may be no statistical significance to it. Unfortunately, we do not have anywhere near enough evidence to be able to make a valid projection of past experience.

2. If we look at the long term chart of the Dow, there have been even more periods in which the cycles have been quite short. This may suggest that the recent experience is unusual rather than the norm.

3. Against this, it seems logical that the longer a boom period runs, the longer it will take to undo the excesses that have built up. However, it really depends on the economic system environment. For example, in the US and Australia in the past, governments have let the market wipe out the failures quickly and we have had earlier recoveries than in Japan, where the Government has propped up a bankrupt banking system and that has led to over a decade of stagnation.

4. One thing that I am sure of is how the psychology of the market tends to work. This suggests that we will not get a recovery until most participants become convinced that things are so bad that we will not see an imminent recovery. This works, because profits are made in markets by assuming risk. If market participants all expect a certain outcome, they will invest that way and there will be no opportunity to profit. If everyone is buying, or selling, then that sets up the situation where we get a swing to the other direction. A bear market starts when everyone has bought. A bull market starts when everyone has sold. If, as you say, everyone is waiting for an imminent bottom to buy in, then what we are most likely to get is further falls. Instead we should be looking for a panic sell-off when everybody has given up hope.

5. My approach is to watch the market and try to assess the progress of the bear market. Dow theory phase analysis gives us an excellent framework for charting where we are, as explained in my books The Aggressive Investor and Building Wealth in the Stock Market (details on my free web site