Bulls and Bears: Chris Caton on investing in 2008

BT: You’ve been around to see some significant ups and downs in investment markets. What stands out for you?

CC: I have vivid memories of the sharemarket crash in 1987. I was working in the US then, and was on a plane between Boston and Seattle to give some economic outlook talks to a client. While I was on the plane the sharemarket fell by 23%. So I had to adjust the forecast somewhat on the fly when I got there. And I remember sitting at breakfast in a hotel the following day in San Diego and thinking gee, this is terrible, this has cost me about four thousand dollars! Of course now it’s a lot easier to win or lose that amount, but it seemed like a lot of money then.

There have been a number of dramatic market movements since then. The one many missed out incidentally was the one where I made a killing, in late March 2006, buying and selling green bananas for a huge profit! So market movements can work in your favour, too.

BT: We know that markets operate in cycles. What market did you first enter in financial services?

CC: In the early '80s I worked for an economic consulting firm in the States. Being an economist, I always link markets back to what’s happening in the economy, and at that time the US economy was still in recession. For the prior ten years, the US sharemarket hadn’t done much at all, but one day it took off and it just kept going. And it did it before the recession ended, and that taught me a lesson. While recessions are never good for markets, recoveries are great.

Interestingly, we even have official start dates and end dates for the previous seven US recessions, provided by a very intelligent-sounding body called the National Bureau of Economic Research. The body that makes those decisions is called the Cycle Dating Committee, and while I lived in the US I was always trying to get on to that committee, because I already had my own bike.

BT: During bear markets it can feel like the hard times will go on forever. What is it that gives you confidence that markets will eventually turn?

CC: There are good grounds for optimism in the current environment. To me there are three things overhanging markets right now – there’s the continued unwinding of the sub-prime/financial services issues in the US, there’s the oil price which I think is overdone, and there’s also the state of the US economy. To me that’s in recession, it’s just that people haven’t fully come to that realisation yet. And the good thing about that is that recessions end.

If you go back and look at the past seven recessions, the US sharemarket has risen by an average of 33% in the next year. The market has always turned before the recession ends, and turned almost like clockwork four months before the recession ends. And then the market has gone up by about a third in the next 12 months. So you can’t wait for the economic news to start to improve before you get back into the market, because if you do, you’ll have missed most of the early part of the rally.

Now that’s coming, we’re just not there yet. And we don’t know whether it’s going to start today, whether it’s going to start six months from now from the same level as today, or whether it’s going to start, say, three months from now at a level 10% lower. But it is coming.

BT: What are your tips for investing in the current market?

CC: I’ve learned, sadly, that they don’t ring a bell the day the market troughs, so the only way investors can benefit from the rise in the market that will eventually happen is to grit their teeth and hang on now. One of the Rothschilds said, about 200 years ago, that the best time to buy is when there’s blood in the streets – even if it’s your blood. The smart investor knows there’s no point in selling now.

BT: Where do you think the terms 'bull' and 'bear' come from?

CC: It’s interesting, there doesn’t seem to be a clear history as to why markets are called that. One of my colleagues suggested that ‘bear’ has something to do with people who sell bearskins in London. That seems fanciful to me. I think the best thing is bulls charge and bears hibernate.