Book Review: Anatomy of the Bear

Anatomy of the Bear: Lessons From Wall Street's Four Great Bottoms by Russell Napier is a very detailed and well researched review of four of Wall Street's greatest bear markets over the last 100 years (1921, 1932, 1949 and 1982). The author is a consultant with CLSA Asia-Pacific Markets.

Anatomy of the Bear looks at the causes of each of the four market bottoms and what tools investors could have used to try and identify when the market bottom had occured. The authour also compares the factors that may have lead investors to identify each market bottom and whether the same indicators would have worked in all four bear markets. The author's conclusion was that the most reliable measure of a market bottoming was the q ratio which reached a low of about 0.3x near the bottom of each of the four bear markets reviewed. (The q ratio is a measure of the stock market's valuation of a company relative to the replacement cost of its assets.) One reservation or query which I have with the potential usefulness of this measure going forward is that the markets now include many more companies that have fewer tangible assets on their balance sheets than during the times under review. Does this affect the usefullness of the measure of cheapness?

Other useful indicators appear to have been cyclically adjusted PE ratios and a recovery in the bond market.

It seems evident from the wealth of data contained in the book that identifying the exact bottom of a bear market is something of an exercise in futility. Economic reports appear to have been mixed during each of the four bear markets. Relying on sentiment would not be a useful approach.

Another important point was that equities became cheap slowly, in some cases very slowly taking several years to reach bottom.

The conclusion I took from the book (and I am not sure if this was the author's intention or not) was that investing when equities become cheap following a contraction in valuation multiples will ultimately produce excellent returns, but will require both patience and the courage of conviction to carry a position through what could be an extended bear market.

Two small negatives. The wealth of data at times made for rather dry reading. Also, the book would have benefitted from both a glossary and an index.