My portfolio, as I laughingly describe it, is 18% down and I think I have got away lightly. It’s a bear market, and it’s time for the bear market clichés to come rushing out of the cupboard like little mice, providing, as they do, advice you should probably already know, but perhaps some little sense of comfort.

So… here are my favourite bear market quotes, starting of course with the foundational investor Benjamin Graham: “There is a considerable tendency for common stock investors to do the greater part of their buying, both of ‘good’ and ‘bad’ securities, at high levels of the market. They are equally inclined to do the greater part of their selling at low levels of the market, a procedure which is not conducive to successful results.”

I just love that “not conducive to successful results” – those were the days when gentlemen spoke with cordial delicacy. He also said of a bear market: “Those with enterprise haven’t the money, and those with money haven’t the enterprise, to buy stocks when they are cheap.” And that certainly applies to me.

Peter Lynch puts into words the thing you should know, but somehow it doesn’t help all that much: “You need to know the market’s going to go down sometimes. If you’re not ready for that, you shouldn’t own stocks. And it’s good when it happens.”

By far my favourite is John Stuart Mill: “The malady of commercial crisis is not, in essence, a matter of the purse but of the mind.” So much of how we understand the modern world is a consequence of what we now describe as “the narrative”. The key to investing is not to dwell in your own mind but to trust the system even when your mind is telling you not to.

But, while knowing the history and the philosophy is one thing, the big question is: what should we do? The best advice is to do nothing. Time heals all wounds, or, alternatively, time wounds all heels. Remember Graham; God forbid that you should do something “not conducive to successful results”.

There is one other theory about bear markets you might be cautious about, and that is the theory that index funds do well on the way up, but managed funds do well, or at least better, on the way down. The statistical data doesn’t support this proposition even though it seems logical.

Index funds, funds that aim at matching the performance of an index, like the S&P 500, are gradually gaining dominance in investing worldwide, mainly because they are cheap and effective. The reason they are cheap is that you are not paying an “expert” to make all kinds of complicated buying and selling decisions. The theory is that because managed funds tend to be more conservative than the market overall, they have an advantage in bear markets.

The reason this doesn’t follow is that many managed funds tend to match the indices closely anyway, and this is because, if you are a fund manager, the chances you will get fired if you underperform the index by a lot is large, but if you underperform just a little, you will probably keep your job.

What performs well during bear markets are hedge funds. But the problem with hedge funds is that they are enormously expensive, erratic and, because they are by nature pessimistic and the market is by nature optimistic, you tend to lose more on the upturn than you gain on the downturn.

For all these reasons, index funds are gradually winning the battle. Passive management now accounts for 45% of all assets for US stock-based funds, and that is up from 25% a decade ago. In South Africa, however, the movement has been slower.

But that may change, and there is fresh news on this. Index fund 10X Investments bought one of its biggest competitors, CoreShares, on Thursday, which results in a full-service indexing business with R31-billion in assets under management (AUM). The deal suggests the index fund business is coming into its own and 10X CEO Tobie van Heerden acknowledges the increasing role that scale plays when building a successful passive business.

But just as an illustration of how far they have to go, this R31-billion AUM compares with Ninety One’s R2.6-trillion AUM and Coronation’s R625-billion AUM, just two of its managed competitors. These asset managers are just fabulous businesses; they are earning profits close to 50% of revenue and generating billions in profits with a staffing level comparable to that of a small supermarket. But looking at the share price performance of some of the asset managers over the past few years, you suspect the market is getting just a little cautious.

They are, after all, a function of the markets themselves. Bears are not picky. DM/BM

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