Did you ever come across a spooky headline which says, “Financial Crisis Bear Market is Scary Close” or “This is a story about a scary bear market” or “It’s Scary time, hold on with the Markets”?
Well, they sure sound scary but in fact “Bear Markets are called Trader’s Paradise”!
Are they really so?
Just like day & night are two phases of the universe, bullish & bearish are two phases of the equity market.
In a bear market, it’s generally a roller coaster ride from high investor optimism to widespread investor fear and pessimism which causes a lot of over-reactions, which then get corrected. Bear markets are a natural part of a market cycle and not only can one survive them, but can also position themselves to benefit from them.
What is a Bear Market?
Bear markets typically last much shorter than an average bull market. However, this is quite different from a market correction.
Technically, when prices fall 20 percent or more from recent highs, signaling pessimism and a negative outlook among most market participants, we say we have been ‘engulfed’ in the bearish market or bear market.
Let’s understand what causes a wave of Bear Market…
The usual cause of a bear market is the ‘fear of the unknown – investors fear uncertainty, but there are other underlying possible reasons for this cause. While the global COVID-19 pandemic caused the most recent 2020 bear market, other historical causes have included widespread investor speculation, irresponsible lending, oil price movements, over-leveraged investing, and more.
For our knowledge let’s have a look at these amazing facts!
Since 1900 there have been 33 Bear Market sightings, so one can conclude it’s occurrence is every 3.6 years on average. If you are unable to ride the fear, better to opt for equity advisory services so you make any rash decisions in such times.
Remembering three most recent notable examples:
2000-2002 dot-com crash: Growing use of the internet in the late 1990s led to a massive speculative bubble in technology stocks. While all major indices fell into the bear market territory after the bubble burst, the Nasdaq was hit especially hard: By late 2002 it had fallen by about 75% from its recent highs.
2008-2009 financial crisis: Due to a wave of subprime mortgage lending and the subsequent packaging of these loans into investable securities, a financial crisis spread across the globe in 2008. Many banks failed, and massive bailouts were required to prevent the U.S. banking system from collapsing. By its March 2009 lows, the S&P 500 had fallen by more than 50% from its previous highs.
2020 COVID-19 crash: The 2020 bear market was triggered by the COVID-19 pandemic spreading across the world and causing economic shutdowns in most developed countries, including the United States. Because of the speed at which economic uncertainty spread, the stock market’s plunge into a bear market in early 2020 was the most rapid in history.
What should I do?
This is certainly a scary time for investors, given that nobody enjoys watching their portfolio turning Red. The colour ‘Red’ means to ‘STOP’, in our terms it means to ‘stop investing’. But what if everything turns red as far as the eye can see.
What are you going to do now?
Stop aiming for the bottom. Trying to time the market at this juncture is unwise. You need to keep reminding yourselves that bear markets aren’t about investing at the bottom, but to buy stocks because we want to own the business for the long term, even if the share price goes down a little more after you buy. If you lack the expertise to pick the right stocks, opt for equity advisory services.
The macroscopic view helps. The fundamental knowledge of investing is to buy low and sell high, but when emotions overtake logic exactly the opposite happens. 8 out of 10 times an average investor by default becomes anxious and significantly underperforms the overall stock market over the long run. The main reason is moving in and out of stock positions too quickly. When stocks plunge and seem as if they’ll keep falling forever, it’s our instinct to sell “before things get any worse.” Then, when bull markets happen and stocks keep reaching new highs, we put our money in for fear of missing out on gains. Invest in stocks that you want to own for the long run, and don’t sell them simply because their prices went down in a bear market.
Build positions over time. Instead of predicting the bottom and piling all your money in at once, a better strategy during a bear market is to build your stock positions gradually over time, even if you think prices are as low as they’re going to get. This way, if you’re wrong and the stock continues to fall, you’ll be able to take advantage of the new lower prices instead of sitting on the side-lines.
Focus on quality. When bear markets hit, it’s true that companies often go out of business. One of the most all-time favourites Warren Buffett quotes is, “When the tide goes out, that’s when we find out who has been swimming naked.” In other words, when the economy goes bad, companies that are overleveraged or don’t have any real competitive advantages tend to get hit the hardest, while high-quality companies tend to outperform. During uncertain times, it’s important to focus on companies with rock-solid balance sheets and clear, durable competitive advantages.
