Three years ago, Vanguard founder Jack Bogle — who Fortune magazine named one of the four investing giants of the 20th century — visited Motley Fool Global Headquarters near Washington D.C. to talk about the collapse of the stock market.

At the time, the S&P 500 index traded at 900, down 40% from its 2007 high. It fell another 26% to bottom at 666 in March 2009 – a crash of 58% from top to bottom.

Australian investors fared similarly. Our S&P/ASX 200 plummeted 53% from its 2007 top to its March 2009 bottom. It was an incredibly painful period for most investors.

GFC II?

Today some commentators are predicting GFC Mark II.

Our market is already down 16% in the past 5 months. Some believe worse is to come, with fears a Greek default could spark contagion, starting with European banks and cascading through the global financial system.

“Debt crisis to drive further rout,” says the Australian Financial Review.

At the coalface, on Bloomberg Philippe Brugere-Trelat of Franklin Mutual European Fund said “Right now markets look like a freight train and stepping in front of one is never a very good idea.”

And then there’s American economic forecaster Harry Dent, in Australia to promote his new book, who says an “economic tsunami” looks set to hit world markets.

As somewhat of an aside, this is the same Harry Dent who in 2006 predicted the Dow would hit 40,000 by the end of the decade. We suggest taking what he says with a large pinch of salt.

Bear market investing

What would Jack Bogle think?

Bear markets, he believes, separate the speculators from the true investors. Your average speculator is three times more interested in the share price of a company than the merits of underlying businesses — and bear markets can shake these speculators out of shares, sometimes forever.

The real investor, by contrast, obsesses over the long-term potential of a business and tries to create true wealth over rolling 10-year periods.

Are you an investor, or are you a speculator?

According to Mr. Bogle, that single distinction makes all the difference in investment returns over a lifetime. True investors — those who do not try to time the market — take home most of the rewards of the market.

That’s tough to accept after the roller-coaster we’ve been on for the past 4 years — because we’re all hurting, speculators and investors alike.

But Bogle’s right. When you factor in frictional costs and short-term tax rates, it’s extremely difficult for speculators to make long-term money by trying to time their way into and out of bull and bear markets.

Just look at the decline in the past 5 months of these five blue chip Australian companies:

BHP Billiton (ASX: BHP) – down 24%

Woodside Petroleum (ASX: WPL) – down 29%

QBE Insurance (ASX: QBE) – down 31%

Westpac Banking Corporation (ASX: WBC) – down 19%

CSL Limited (ASX: CSL) – down 24%

These are companies with multi-decade histories of success. Yet in a matter of just months, their value has been nearly cut by a quarter.

And you don’t have to dig to find greater calamities. Fairfax Media (ASX: FXJ), even after its 22% rally from its recent bottoms, is still down 37% in the last 5 months.

Macquarie Group (ASX: MQG), the investment bank once known as the millionaire’s factory, is down almost 35%.

Shattered investing dreams

The world’s share markets right now are a graveyard of broken dreams.

And yet, on average, had you attempted to sell these companies near their highs, to pay the commission costs, to pay the tax penalties, and then to try to time your way back into them, you’d almost certainly have failed. Jack Bogle has proven this over his 60 years of investment scholarship and application.

Investors, on the other hand, suffer along with everyone else when the bear market hits, but let time and compounding work their magic.

Just look back on history — master investors like Charlie Munger and Shelby Davis suffered big losses during the 1973-74 bear market en route to growing portfolios valued in the millions (or, rather, the hundreds of millions).

You can’t pick the bottom of the share market

We think you can do the same — no matter how much you’ve lost. You don’t see the very best investors, including Warren Buffett, running for the apparent safety of cash every time markets slump.

Buffett has seen it all before. He put billions to work in 2008, and made billions from investments in General Electric and Goldman Sachs. He’s doing it again in 2011, this time by investing $5 billion in Bank of America.

Buffett didn’t pick the bottom of the last bear market – he was months too early. But that didn’t bother him, and certainly didn’t stop him making billions from his investments.

The Foolish bottom line

The same may happen this time around. Again, Buffett won’t care. Over time, he’s confident stock markets will move higher, and economies will get stronger. And with the recovery, he’ll make billions more.

As ever, the future is uncertain. But the time to buy shares is when all others are selling. This may not be the bottom of the market, but putting money to work, when shares are cheap, has proven to be a recipe for investing success. We think history will be repeated.

Are you worried about the state of the markets right now? Get the Fool’s latest free guide, Read This Before The Next Market Crash. Click here to sign up for your free copy.

Bruce Jackson has an interest in BHP Billiton Westpac.  The Motley Fool has a mighty fine disclosure policy.

 

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