For three years, participants around the world have been debating the stock market’s ascent: Is it a genuine bull market or not? This question has puzzled me for a long time, too. After all, I hold myself out as a clear-eyed talking head, anything but a cheerleader. Today I’ll suggest a new way to address the question.

To refresh your memory, three basic arguments characterize the post-2003 debate. One is the idea that the bull market that commenced in 1982 never really ended. Another thought is that this is an altogether new bull market. Others call the post-2003 surge nothing but a bear market rally, albeit a strong one, that will end in tears just as investors' become accustomed to the new paradigm of economic and market functionalities. When this happens, this argument goes, the bear market that started in 2000 will reaffirm itself and continue to tyrannize the always hopeful and usually long-position-only investors

A new book, Anatomy of the Bear: Lessons from Wall Street's Four Great Bottoms (CLSA Books 2005), offers essential advice on how investors can determine what’s really going on. Russell Napier, a 16-year global investment strategist and consultant and an astute observer of financial history, has authored a deus ex machina for the bull vs. bear drama.

Napier escorts the reader on a fascinating journey through 100 years of US financial history with the purpose of identifying ways to help investors' spot stock market bottoms. In other words, Napier points out what usually takes place when a bear market ends and a bull market commences. Investors should note that--surprise!--history does repeat itself. Similar circumstances prevail when big bottoms are established and new multiyear bull markets start, even though the specific bear markets can differ in nature. This is one of the remarkable insights of Napier's book: the identification of indicators that signaled the bottoms of the major bear markets in Wall Street and could work in identifying the next big bottom, too. An exercise of the short, if successful, can offer extraordinary returns to the patient investor.

Napier has identified four great bear market bottoms in Wall Street's history--1921, 1931, 1949 and 1982--and analyzed them by examining, among other things, 70,000 articles from The Wall Street Journal published in the two months before and the two months after the bottoms were established. The idea is to “provide as accurate a picture as possible of a bear-market bottom based on contemporary comment.” Napier has succeeded.

Each of the book’s sections begins with an analysis of the economic, political, social and historical changes taking place at the time of the particular bottom being discussed. Napier describes the Dow's performance in the years leading to the bottom, as well as the Fed's involvement in the financial and economic life of the US during these times. He also examines the structure of the market the year of the bottom (i.e., what were the preferred investments at the time). Finally, he analyzes the environment at the bottom of the market, offering superb observations on what was happening and why.

In the process, Napier debunks certain myths that have misled generations of investors. He explains for example, why the famous 1929-32 bear market was not, after all, the classic example of a bear market everyone thinks it was, and deconstructs the commonly offered advice that the right time to buy stocks is when no one wants to hear about them (i.e., when all the news is bad). Following this bit would have led to missing out on some of the greatest opportunities in the 20th century.

This is a book for the intelligent investor, in that there are no shortcuts. Napier has gathered the signals investors should look for in identifying a market bottom, but it’s up to the individual to determine when the signals indicate a buying opportunity. Napier does apply his findings to the current market environment, offering a verdict on the debate described above; that said, each one of us could take these indicators and reach different conclusions, since human judgment drives markets.

Great bull markets commence when big changes take place in an economy. And as Napier notes in his introduction, “There was the birth of the consumer society (1921), the birth of big government (1932), the birth of the military-industrial complex (1949) and the rebirth of free markets (1982).”

The challenge for investors is to identify the next big change and capitalize on it. Russell Napier's book is an excellent guide; it just needs to be put to use.

© 2006 Yiannis G. Mostrous
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