A question about investing basics

Here is one of those investing basics that I've always wondered about:

Company stock prices that do better than the market average (beta) during a bull market go down more than the market average during a bear market.

Seems to me that if the market were truly efficient, that wouldn't happen. Here's my logic -- if a company is better managed than average (which makes it price go up more than the average during the bull market), then it should also be better managed during the bear market as well, meaning the stock price should go less than the average.

I gather that part of the answer lies in the differences in how macroeconomic factors affect different businesses -- for instance, some businesses flourish during periods of low interest rates but are taken down more than average during period of high interest rates.

But some of the answer is simply psychology -- during bull markets, investors drive prices of "sexy" stocks higher. These are usually connected to high tech. During bear markets and hard times these companies don't do as well.

Some of this is related to the phase of growth that a company is in. During its intial growth phases its stock price does better than average because traders assume its growth rate will continue for years to be higher than stodgy old "mature" companies that are well established (and which make up most of the market, determinining the market average). But during bad times these companies do worse because they're not established. They don't have reserves to draw on.

So that's another reason to invest in stodgy old "mature" companies that pay dividends. Their stock prices don't go up as much during bull markets, but their prices don't down as far during bear markets.


investing basics
investing basics