This is a precis of a presentation given by Ken Norquay on Jan 17, 2009.    

"2009 was a rough year for stock market investors.  Hands up, everyone who did not have significant losses in the stock market portion of your investments. [almost all hands went up in this audience of 450 investors]

Question #2:  bulls and bears
If you think the major trend of the stock market in 2009 is up, you're a bull.
If you think the major trend for 2009 is still down, you're a bear.
BEARS – hands up  [about 1/2 of the audience]
BULLS – hands up   [about 1/3 of the audience]

When you've had a loss like most of you have had in 2009, what does it do to you.  What is the effect of the loss on your behaviour as an investor?

Even those of you who are investment professionals; remember, you are a human being first, and an investment professional second.

So, what effect does a loss have on normal human beings?

Well, the best work I've seen on this topic was a book published in 1969 by by a lady named Dr. Elisabeth Kubler-Ross.  She studied ordinary human beings like us after they had had an emotional trauma.  Her book was about the tragedy of a death of a loved one.  Her work has been expanded to include divorce trauma… or maybe the doctor just told you you have an incurable disease – how do human beings behave in loss trauma.  Her findings are now studied by social science students in every university in Western society.

She discovered that people who suffer an emotional shock due to a loss go through 5 phases:
Denial, Anger, Bargaining, Depression, Acceptance.

Some of you have suffered financial loss this past year.  Let's do a quick review of the Kubler Ross phases and see if we can observe some of these problems in ourselves.

The anger phase is self explanatory, isn't it?  People will angrily lash out at someone or some situation  and blame that for their loss.
"It's George Bush's fault!  They should have regulated those American mortgage companies."
"It's my financial planner's fault!  He had me over exposed to the stock market."
"It's my investment manager's fault.  Why didn't he sell me out!"
Anger and Blame?

The bargaining phase sees the emotionally distraught person trying to releive their pain by bargaining with God, or the devil, or themselves, or the system… "If I do this, will you take away the pain?"  Some call this stage the rationalization stage.
"OK, I see that some mistakes have been made.  I see that I have to plan my retirement in a different way, and I will do it once the stock market goes back up."
"It's too late to sell.  It's almost at the bottom.  I'll hold for now.  I'm in for the long term."
Does this sound like rationalization and bargaining?
Depression:  "If only I had done this… I'd be OK now.  Now there's nothing I can do.  I can't go on."

People who are in emotional shock because of a loss often bounce back and forth between these various Kubler-Ross stages, until they finally reach acceptance.

At the acceptance stage, your mind begins to clear and you can get on with your life.

These emotions hit closer to home than most people think.  Kubler-Ross's phases have the effect of protecting us from the pain of our loss.  When we recognize that we are caught in these 5 phases, we begin to feel that pain.

I recognize that some of you are feeling quite uneasy right now.  Please see this through.  There is an effective logical solution to your stock market problem.  Once we’ve felt the pain of our loss, we can accept the loss, then we can explore solutions to our problems.

I’m going to explain what's going on in the financial world.  Those of you who have reached the 'acceptance' stage will see it clearly.  Those who are still trapped in the Kubler-Ross phases will find it more difficult.  Once we see the painful reality of what happened, it is relatively easy to find the solution.  And there IS a solution.  You WILL be OK.

Let's look at the stock market and at the investment industry.

This is a chart of the Dow Jones Industrials - total return index.  Total return means that the chart automatically adds in the dividends each year.  This index outperforms the actual DJII by the accumulated amount of the dividends. 

It goes back over 100 years.

This straight blue line is the one the mutual funds salesmen are referring to when they say that the stock market goes up about 10% over the long term.  It is the smoothed average over the whole 100 years.  Notice that there are long periods of time within the 100 years: the alternating periods shaded green and white

The long green sections are long times where the real Dow Jones Total Return Index outperformed the straight line average of 9.8% (the slope of the line from beginning to end is both positive and steeper than the slope of the blue line).  We call these long times "secular bull markets."

The long white sections are eras where the real Dow Jones underperformed the straight line (the slope of the line is less than the slope of the blue line or even negative).  These are called "secular bear markets."

We have been in a secular bear market for 8-9 years.

The way to make money in a secular bull market is to do what Warren Buffet is said to do:  Buy and hold good quality business's for the long term.

The way to make money in a secular bear market is to do what Sir John Templeton used to do.  When I was a rookie financial consultant with Merrill Lynch in the 1970's, I remember Sir John saying: "We shop the world for unrecognized value.  We buy these stocks and hold them until the value is fully recognized."

In a 15-year secular bull market, buy-and-hold works.

In a 15 year secular bear market, buy low, sell high works.  Your investment manager has to buy AND sell, not just buy.

Secular Bull Markets are the times of The Financial Participant.  If you participate in the stock market, you make money.  And the people who make the most are the financial salesmen. 

Secular Bear Markets are the times of The Financial Warrior.  You make profits by selling your stocks to other investors at the top and buying them back from other investors at the bottom.  Totally different strategy.  Some investors make money, some lose.

The problem in the investment business today is the big investment firms' business plans are geared for the secular bull - and we have been in a secular bear for over 8 years.  That's why almost all their rates of return since 2000 have been negative: holding a portfolio of stocks in a bear market doesn't work.

I have a business proposition for you.  I need 20 or 30 investors with 10 to 20 thousand dollars each to invest.  We will start a family of mutual funds and manage them the way John Templeton used to manage his funds.  There are three types of  equity funds:  growth, value and momentum.  My company, Castlemoore, is a momentum manager - in addition to us, we'll need a good value manager and a good growth manager.  We'll create a combination growth and momentum fund and a combination value and momentum fund like Sir John had.  Then we’ll encourage ordinary mutual fund investors to switch from their obsolete 'buy and hold' funds to our new 'buy hold and know when to sell' funds. 

Sometimes it's hard to change when you're trapped in the Kubler Ross phases.  Human beings need time to adjust their way of thinking.  So, take your time and ponder the concept of a secular bull and secular bear market.  That is the reality that is affecting your portfolio performance right now.  But don't fall asleep at the switch.

1. Beyond the Bull, Ken Norquay CMT, 2008, Bastlon Publishing Services
   
   Discusses the illusions of modern financial markets and how ordinary investors should adapt their thinking and investing styles to take advantage of other peoples financial mistakes.
   
   
2. Extraordinary Popular Delusions and the Madness of Crowds, Charles Mackay L.L.D., 1841, Harmony Books
   
   Reviews a series of historical financial events (E.G. Tulip-o-mania, The South Sea Bubble...) and helps investors understand how massive long term financial attitudes affect our way of thinking about investing. Goes on to discuss similar non-financial phenomena.
   
   
3. Reminiscences of a Stock Operator, Edwin Lefavre, 1922, Marketplace Books
   
   A novel about a stock trader in the early 1900s, this book helps today's investors understand that there are many things going on behind the scenes that can affect your investments. A study of greed and fear.