An investing life lesson like this bear market is rare. So, take advantage of the opportunity to learn from it.
The payoff will be confidence and understanding for dealing with many unsettling stock market periods.
The six learning components for this bear market:
- Accept that a bear market’s moves can seem inexplicable. Their cause is unclear because there is only a hint of some future fundamental reversal coming that could affect the economy and/or general stock market. One thing is certain: Currently known events are rarely the cause.
- Search for “bear market” and “stock market” news by date to see the absence of helpful information and insight. In fact, you will often see a supposed explanation for a rise/drop become instantly disproven by a quick reversal. Almost all articles written during a bear market contain erroneous and misleading observations, reasoning and advice. This truth is evident by the lack of consensus. Assertions cover the waterfront and often conflict with one another. Worst of all are the emphatic assurances and scare tactics employed to attract readers.
- Witness (and feel) the bear market’s effects on the investing community (portfolio managers, analysts, advisers, commentators, and reporters). Unlike most bull markets, you will see that everyone (even the most experienced professional) experiences the same emotional fallout from a bear market: concern, frustration and anxiety.
- Read old books about bear markets. Why old? Because recent books usually focus on current conditions. What we need is an understanding of bear market’s enduring characteristics and basic truths. Fortunately, bear market books are few, so this is not an arduous assignment. In fact, you can gain a lot by reading one book: Bear Market Investment Strategies by Harry D. Schultz.
- Read The Great Crash by John Kenneth Galbraith. It explains perfectly how the bull to bear period developed. The detailed actions and reactions of the investment community enhance understanding of what happens in any bull to bear shift.
- Search The New York Times website for “bear market.” They have all of their articles, going back to the 1800s. The first observation is how many bear market periods the stock market has had. The second is how similar the past articles sound, compared to today’s writings. Last, although it takes more time and work, look at the timing of the most bearish articles – you will see they occur at or very near the bottom.
The big payoff has four routes
With the understanding gained above, you will be in a position to gain in a bear market period. Here are the ways to gain:
- Prevent making sales near the bottom, then missing out on the recovery. Knowledge and a skeptical eye can keep the emotions at bay that would otherwise have you sell out at the bottom.
- Prevent making trades from growth/value stocks to “safe” investments. “Safe” issues like utilities, REITs and gold can mean less down in a bear market, but it also means less up in the recovery. Furthermore, if the switches occur after prices are already down significantly, they lock in losses that will not be recovered.
- Make sales early, then reinvest when a selling climax appears. Many professionals practice this contrarian approach. Usually, it means selling some holdings (perhaps “weaker” issues) to build up some cash reserves for opportunistic buying later. However, it also can mean selling all holdings, then looking for a good time to reenter the market. (This is my approach, because I prefer a clean slate and clear mind as the market gyrates.)