From colossus to clown in one easy bear-market lesson

For instance, in the bull market from March 2003 to November last year, the market rose 152%, and 94.9% of the ASX 200 stocks went up. The odds were on our side.

From the fundamental day trader (highest element of luck) to the technical long-term investor (lowest element of luck) we all bestrode the narrow sharemarket like a colossus.

We were endowed with wisdom; attributed with skill. Our every guess was a shrewd, sophisticated investment. There was no separating the men from the boys. We all stood as men (and women).

Then the market fell over and the odds reversed.

From November 1 last year to now, the market has fallen 28.6%, and 88.35% of the ASX 200 stocks have fallen.

The odds have gone against us. We now stand revealed. Colossal no more, just finger in the air, no research, punt on a whim, wallowing around in our own waffle trying to explain to our dependants why we got it all wrong.

But there has only really been one ingredient for failure, the fact that we were in the market at all.

In Australia, nothing has been spared. In the quality end of the market, National Australia Bank is down 46% from peak to recent trough, ANZ down 50.8%, Commonwealth Bank 39.4%, Westpac 39.9%, Macquarie 54.2%, Origin 51.8%, St George Bank 43% (despite a bid), Westfield 39.3%, Suncorp-Metway 47%, AMP 44%, Newcrest 39%, Santos 46%, Foster's 73%, Brambles 49% and Fortescue 53%. That's before we get to the stocks that are down more than 80% like Babcock & Brown and many others.

You can go looking for someone to blame in all this, but the truth is there was a freight train on the line and it was going the wrong way. No one had a chance.

A bear market is a great educator and it has great long-term benefits. We never learn as much as when we lose money. I don't know about you, but this is what I have learned:

? That not taking losses because we are long-term investors is a joke.

? That big drivers are more important than the detail and the biggest driver of all is the market. All boats fall with the tide. Well, 88.35% of them, anyway.

? That technical indicators have enormous value. It is the study of the herd, how many people are buying, how many are selling, how many they are buying, how many they are selling and who has the ascendancy. It's all that matters sometimes.

? To use stop losses.

? That the future is not an extrapolation of the past and that so much financial theory is flawed because of this assumption.

? That only Warren Buffett is Warren Buffett and the rest of us cannot emulate his long-term philosophy because we don't have his capacity to suffer the losses even he suffers in the short term.

? That when you stand up at the desk and pump your fist in delight, it means SELL.

? That whatever trend is making you money this year

will not make you money forever.

? Not to confuse luck in a bull market with sophisticated investment.

? That today's colossus (guru) is tomorrow's boy. Even Warren Buffett will look like a complete knob when/if the US goes bust.

? That being a "great" company does not guarantee a great share price (Foster's).

? That we never learn and what we do learn we progressively forget as the market rises.

But this waffle is of little use without action. For my part, I will emerge from the bear market with the following:

A stop-loss mechanism on every trade, short or long term, bull or bear market; a healthy respect for technical indicators; an open mind and, I'm afraid, a disappointment with the perpetually bullish nature of "fundamental" research. It cannot help itself.

And that, my friends, is an old story for another day.