Imagine: You are on a Safari trip to Jim Corbett, high on spirits you get down to cherish the serene environment and you see a bear approaching what do you do? Tuck in your arms and play dead. Fighting back can be extremely dangerous. Similarly in a bear market it can be awfully risky because it is quite difficult for an investor to make stellar gains, Right isn’t it? Wait for a moment, this is not really the truth! This is the most common myth you’ll find all around you! Sounds strange and contrary to the common belief? Yes it does because this is how most of us feel during bearish times.
But what is a bear phase? Isn’t it just a downturn in the market or is it something else? Let me help you know it better. Think about this: you have been dreaming about that designer pair of jeans you saw last month. You absolutely loved it, but you believed it was overpriced! So you didn’t buy. This is what most of us do if we think something is overpriced. But a few days later you heard to your surprise about the end of season grand sale – up to 70% off! Hurray! You just rush to grab it. I would do the same. If I get the same pair for its true worth, then why overpay and break our banks to get it?
So have you ever thought of a bear phase in a similar manner? Ever thought of it as a grand end of season sale in the stock market giving you a good discount on your favorite companies? Now think of applying the same logic when investing in the stock market during a bear phase. Sounds interesting? Read on.
But why do people fear a bear phase? I’ll tell you why. There is a two edged sword which is perceived to hang over our necks during a bear phase. On one side, we fear loss of value for the money invested during a boom phase. On the other, we believe if we buy during a bear phase the markets will continue falling further and again we’ll lose money.
I agree. It’s quite a genuine fear. It is risky and no one wants to lose their hard earned money! But as the world’s most famous and successful investor, Warren Buffett, once said, “Risk comes from not knowing what you’re doing”, there is no risk if you know how and when to take advantage of a bear phase!
You must be curious to know how to enter stock markets in a bear phase and benefit? It’s simple – follow the concept of “Value Investing”. It is the technique followed by bigwigs like Warren Buffet, whereby he turned $105,000 into $30 billion.
Value Investing is all about doing a little bit of fundamental analysis before buying a business. A business that promises to grow in the future, which would make us rich and wealthy, is worth holding onto forever. Thus we can then be sure that we won’t own the business for ten minutes unless we’re willing to own it for ten years! For owning such a business you also need to be sure that you buy it at the right price and don’t overpay i.e. buy it during a sale! Isn’t it wonderful? Would you not like to do the same? I’m sure you would as any sensible investor would want to.
Warren Buffett while lecturing to a group of students at Columbia University when he was 21 years old, said, “I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.” This reiterates the fact that you don’t need to fear the bear phase. Most Value Investors like Warren Buffett, Benjamin Graham, and many others, all often build up their position in some of their favorite companies during less than cheery times in the market. This is so because they know that the market’s maniac-depressive nature can punish even good companies more than warranted.
If you follow a few simple rules, you can be rest assured that you don’t have to play spectator or sell in panic when the market crashes or as we mentioned earlier when the grand sale is on.
“Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.” Okay, I know that’s easier said than done. But this is exactly why value investing exists. The big grand sale is for the very same purpose. It is there so that you buy fundamentally strong businesses at discounted prices which will always follow the rules! Doesn’t it seem to be having some magical powers? Take a deep breath, and then hang on for the ride!
One word of caution: if you enter the stock market during a bear phase and start buying anything and everything you find cheap is not going to make you rich. Again quoting the World Guru of investment, Warren Buffett, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”, just reiterates our point.
So what are you waiting for? Go ahead and grab your favourite companies…they’re selling for a heavy discount. It’s time I welcome you to the world of value investing.
* No conditions apply….lol!
Disclaimer: A few of the ideas here have been contributed by my friends… thanks.