Tips for Surviving a Bear Market
On May 21, US stocks briefly dipped their toes into a bear market with the Nasdaq falling 20% or more, and the S&P 500 nearing that critical 20% figure since the highs. And while it remains to be seen if a real bear emerges, investors can hardly be blamed for being tempted to capitulate.
For most sectors, 2022 has been a bloodbath. The tech sector is a train wreck, with many of the COVID darlings now in severe correction mode. Global stocks recently recorded the longest weekly losing streak since 2008. And the Russell 2000, which is the benchmark for small caps, is deep in the red year-to-date.
It seems that every time the market starts to rally, bad news brings it back down shortly after. And for many new investors, whose only experience with a bear market was the whiplash-inducing crash and euphoric rise of March 2020, this situation may seem a bit daunting.
The reason we aren’t seeing a quick recovery from the current downturn is complex, but one major factor is that central banks can’t just cut rates and flood the world with money. They have to tighten to deal with very hot, decades-high inflation. And this is taking the momentum out of the market, which is digesting the stubborn ongoing pandemic, the ongoing crisis in Ukraine, and the resulting messed up supply chains.
This all leads to negative sentiment, creating the self-fulfilling prophecy of continuous negative markets as “Recession” gets thrown around. So, in summary, things are a bit messy right now.
But, as we have said many times before, you should rejoice if your stocks are on sale. You just need to keep perspective and follow some simple wisdom . . .
It’s just “The Market”
Saying it’s a bull or bear market is kind of useless. It’s also the kind of sentiment that will lead you to make behavioral mistakes. As Ian Cassel famously noted, “Investors tend to over-analyze when stocks are going down (fear) and under-analyze when stocks are going up (greed)”.
The definition of a bear market is quite arbitrary when you think about it. Because there’s almost always a bull market if you look in the right sector (like energy right now), just like there’s always a bear. It’s just the market, so forget the noise and stick to your strategy.
Which brings us to a very important point . . .
Think like a long-term Buyer
Trying to time investments in a bear market usually doesn’t work out, mostly because by the time you realize you are in one you are almost out. And bull markets last considerably longer than bear markets, which appear to be reducing in duration these days. As the saying goes, the market takes the stairs up and the elevator down.
This has been proven time and time again, so unless you need the money (which is an entirely different discussion) just ride it out.
On that note, a down market is the perfect time to understand what kind of investor you are. If you are a good one, you are constantly looking to buy good quality companies at good prices. This is because you want to own good businesses with solid fundamentals at fair value, not bull market hype.
In fact, a good investor—one who follows the tried-and-true, Warren Buffet-style approach of simply buying and holding—generally wants a bear market. It puts great stocks on sale, meaning more for less. That is, if you bought a solid business it will be fine, so consider buying the sale.
And if you don’t feel like this about your positions, it’s probably because you bought hype, not substance.
Re-assess your picks
The biggest risk we see in a market like this is financing. This is why high-flying tech stocks with expensive valuations are getting smoked. A lot of these names are going to have to raise money, and that has gotten more expensive.
However, most of the companies that are self-funding are fine. They will sail through this market, irrespective of the micro or macro conditions. There is no fear of dilution or additional debt. Whether it’s Apple or a healthy microcap, these companies are where you should consider putting your money.
That brings us to an important distinction.
Large caps draw in sophisticated investors who use a broad range of tools (like margin and ETF’s) and strategies to extract value. This can create artificial demand, as sophisticated and unsophisticated investors both pile into a trade that comes with fairly easy (yet often dangerous) tools. It becomes popular, emotional, and then deviates from a proper valuation.
A unique feature of microcaps is that they don’t tend to attract leveraged and sophisticated investment techniques because there aren’t many ways to buy them other than a bit of margin here and there.
So you don’t get artificial demand with these types of stocks, although you can have wild swings due to liquidity constraints and this leads to large spreads. So, if possible, try not to market buy.
And finally, the most important thing to remember . . .
This time is not different
The common retort to all this is “yeah, but this time is different,” followed by some explanation that the end of all things is finally upon us. A debt collapse, a global currency crisis, WW3, and so forth.
Googling “stock market crash” is a good way to work yourself into a frenzy, as you’ll no doubt end up on one of the endless perma-bear websites or doom-scrolling through Reddit opinions on the end of capital markets.
Don’t do that. Down markets are completely normal. Sometimes they are harsh and long-lasting, sometimes light. Sometimes they reflect larger problems such as unprecedented events (COVID) and unconventional monetary policy. And sometimes nobody knows why they are happening.
Either way, good companies will ride these corrections out, and history has generally proven this to be true. So do not deviate from a sound strategy, and make sure to follow us as we do our best to bring you companies that we think you should be looking at.