How to invest in a bear market is a critical question as there are a lot of misconceptions about the true value of an investment and how to prudently survive if blood is in the streets.
Beginner investors don’t usually have the experience in various economic and stock market cycles. Thus the biggest mistakes that beginner investors make is oversimplifying the the principles introduced in various investment books or concepts advertised by investment gurus. Some of the greatest investors are especially known for their ideas of being long of anything cheap, despite what is going on around us. Beginners may mistakenly think that the down trending or bear market makes the investment in general very cheap. The truth is that the bear market makes investments mispriced. The value of the companies are change less often or gradually. The stock prices in stock exchange may change fast.
Sometimes during the bear markets it is simpler to filter out certain target companies that may become good investments in your portfolio. And it unsurprisingly happens when the market has an unwarranted negative view and is not favoring any companies. Right, but it is not easy.
There are mispricings to both sides. The upside and downside, the overvaluations and undervaluations. As there are thousands of listed companies to choose from it is becoming real headache for the beginner.
Stock market tends to be relatively efficient. And by finding the investments that have declined in price may seem good investment. Still the problem is that there is certainly a reason for the decline. So it is very common that the investor steps into value trap investment that is difficult to liquidate and that earns negative or zero return.
For value investors however, the decline is a major opportunity to find bargains. The mispriced companies can be found everywhere, from basically every sector and from small sized to large size companies.
I am a turnaround investor, so the bear market is extremely difficult for me as the already problematic companies will be especially oversold during this period. So during the bear market I am looking other opportunities and trying to value those that are in good shape. So I am looking opportunities from elsewhere and less from those segments where are the companies making transitions.
The most important thing to remember is that one should try to find out the real value of the company. If the beginner investor is not capable of calculating the values by himself, then its right time to check some reliable sources. Lot of free analyses can be found from Seeking Alpha, Morningstar.com or Zacks.com for example with buy or sell recommendations. Still I strongly advice to develop the right mindset which is to try to value the companies by yourself. I have told before that listening the advice from others is not 100% investing it is sort of speculating as the investor does not have its own viewpoint of the nature and the value of the business.
So that if some analyst publishes buy recommendation for the stock, you need to remember:
Just because something has fallen by 90% doesn’t mean that it can’t fall by another 90%
Especially important to bear in mind during the bear markets.
We do not know then the market turns from bull to bear market. So, invest with caution by minimizing risk. Look only for real and good opportunities – the ones where intrinsic value is very clearly above the market price.