Bear markets are an investor’s best friend. During major stock-market downtrends, you stand a better chance of building up a big lead over indexed investors. If your goal is to beat the market over the long term, then bear markets play a crucial role.

Of course, even when you beat a falling market, odds are that you still lose money in absolute terms. But “beating the market” is relative, not absolute. 

There is both theoretical as well as empirical support for shifting your perspective. Theoretically, it stands to reason that it would be easier to add value during a bear market, since time spent in lower-risk stocks or other asset classes will cause your portfolio to lose less than the market itself. During bull markets, those lower-risk stocks or alternative assets typically will lag the market.

This insight is supported by the data, at least as far as investment newsletters are concerned. The chart below shows the percentage of investment newsletters audited by my firm that beat the market during uptrends and downtrends since 1980. To determine the beginning and end dates of the major trend, I relied on a calendar of bull- and bear markets maintained by Ned Davis Research.

Notice that the percentage of newsletters beating the market is far higher in bear markets — more than twice as high, in fact — than during the average bull market. Note also that this bear-market percentage is above 50%. If you were relying on performance during bull markets alone to beat the market over the long term, your odds of success would be far less.

This same pattern of investment performance is also evident with Warren Buffett, chairman and CEO of Berkshire Hathaway BRK.A, +1.39%, BRK.B, +1.48%, who is widely considered to be the most successful investor of these times. In calendar years since 1965 (when Buffett acquired Berkshire) in which the S&P 500 SPX, +1.92% declined, Buffett’s annual alpha — the amount by which he beat the S&P 500 — averaged 23.3 percentage points. In contrast, Buffett’s alpha in calendar years when the S&P 500 rose was 3.2 percentage points.

If we focus on the period since 2000, Buffett’s annual alpha during years in which the S&P 500 declined was 21.4 percentage points, in contrast to minus 3.6 percentage points in years when the index rose. Which means that for the past 20+ years, Buffett would not have beaten the market were it not for bear markets.