In the short text that introduces my blog, I say that 'The current financial environment is arguing in favour of a more active investment strategy'.

In a nutshell, the idea behind that phrase was that:

• 200 years of stock market history in the US have shown that there is a repeating cycle of secular bull markets ('secular' meaning that these markets last somewhere between 10 and 20 years) followed by what Vitaliy Katzenelson in his book 'Active Value Investing' (1) calls secular 'range-bound' markets ('range-bound' as opposed to 'bear' markets, which would suggest negative annualised returns over a long time period. Apart from the 1930s, that has never been the case);
  
• in a secular bull market, real (inflation-adjusted) annualised equity returns have historically been around 13%, whereas in a secular range-bound market, they have been close to zero;
  
• the last secular bull market began in 1982 and ended in 2000. It followed a 15-year range-bound market (the Standard&Poor's 500 index basically did nothing between 1966 and 1982);
  
• 8 years after the end of this secular bull market, most major markets are still some 15% to 30% below their 2000 peak. It is entirely conceivable that some of these markets will not be much higher in 2015 than they were in 2000;
  
• each secular bull market started when equity valuations were very cheap (a P/E between 6 and 10 - the long-term average for the P/E being around 15) and ended when they were very high;
  
• even in a secular range-bound market, there can be cyclical bull and bear phases. In the current range-bound market, there was a cyclical bear market between 2000 and the first quarter of 2003, and a cyclical bull market between the second quarter of 2003 and the third quarter of 2007;
  
• in a secular bull market, there is no great need for an active investment strategy as a simple 'buy-and-hold' strategy produces good results;
  
• in a secular range-bound market, a passive investment strategy produces disappointing results and active portfolio management makes sense;
  
• active portfolio management can mean trying to 'play' the cyclical 'up' and 'down' phases of the markets; investing in regions/sectors that have a more favourable long-term outlook; or engaging in careful stockpicking by buying companies that have both good growth prospects and are reasonably valued.

What does all this mean in today's environment?

First, most major industrialised markets seem to be in a cyclical down phase of a secular range-bound market. A secular bull market needs rising earnings and multiples expansion, a cyclical bull market at least one of the two. The conditions for this to happen are simply not in place in the current environment.

There is obviously the possibility of a technical rebound from what a few days ago were very oversold levels. Such a recovery is even more probable since one of the fears currently weighing on equity prices, i.e. inflation, might rapidly disappear if oil prices stabilize or correct. However such a rebound would last a few weeks or months rather than a few years and one would need to be very good at market timing to make a lot of money in it.

Second, even though emerging countries are not insulated from the current economic malaise, their long-term growth outlook remains intact given the positive trends in consumption and infrastructure spending. In the first half of 2008, the performance of the emerging equity markets was in line with the developed countries, which might seem disappointing but was actually substantially better than the strong sell-offs emerging markets typically saw in the past when developed markets declined. This shows that emerging markets have become more mature. They remain in a secular bull market and valuations today are at levels which in the past have been good buying opportunities.

Third, dividends will again be an important factor in equity returns. In range-bound markets, they have historically represented 90% of total returns, as opposed to only 19% in bull markets.

Fourth, bear markets often allow long-term investors to buy good companies at low prices. Warren Buffett has often said that true investors are pleased when the rest of the world turns pessimistic. "We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It's optimism that is the enemy of the rational buyer. You pay a very high price in the stock market for a cheery consensus." In the current environment it is more than ever important to remember that in the long run, it is a company's fundamentals that will win out. It is also in times like these that it is possible to buy shares of high-quality companies at attractive prices.

(1) Vitaly N. Katzenelson : Active Value Investing; Wiley Finance