In the wild, the way to survive a bear attack differs. For grizzlies, it is best to play dead so that they believe that you are no longer a threat, while with black bears, you should show that you are ready to fight.
I am happy to admit that I have no experience, nor can I vouch for any of the above. However, I have been in the market for over 30 years and have experienced a few cycles.
So, while I reserve the right to be wrong, here are some thoughts on surviving bear markets.
It certainly is no fun seeing red all over your balance sheet and trying to make sense of all the bad news out there. However, one should keep a sense of optimism that the cycle will turn again.
I try to look beyond the near term. Hopefully, as time goes on, many of these issues will be addressed and seem less threatening.
Just as we saw during the pandemic, while there was initially no clear silver lining, our ability and sense of preservation meant that science prevailed, and the world has been able to move on.
One hears of people either waiting for the bottom or until things settle, before investing. However, in the case of the former, the market doesn’t always give you a clear indication of where the bottom is and it sometimes just zips up, leaving the prospective investor unsure of his next move and whether it will fall again or whether the bottom has already been hit.
With the latter, markets can be forward-looking and by the time there are signs of green shoots, the market has shot up and the bargains that were once available are gone.
Remember these 4 rules:
Rule 1: Stagger into market
It might be appropriate to stagger into the market even if it hurts. As long as you have your next tranche available, the market will find it hard to get away from you.
If it falls, one can invest again – averaging your loss and time in the market and if it goes up, then at least a portion of one’s investment has caught it at lower prices.
Have a strong stomach and a good calculator.
Rule 2: Research into the intrinsic value
There is always bad news out there, and declines will happen. Hopefully, these are temporal and not structural.
Meaning that there has been no material impact to a company’s prospects. Of course, the appropriate amount of research into the intrinsic value needs to be done as this provides the foundation of one’s belief during times of volatility.
Rule 3: Do not leverage
Invest only what you can afford to lose and do not leverage.
Leverage can leave some investors in a squeezed position forcing them to exit and experience a permanent loss, when otherwise the investments would’ve recovered over time.
Rule 4: Not to let extreme risks cloud your judgment
It is my belief that it is better not to let extreme risks cloud your sense of judgment and to keep a sense of moderation. To put it simply – “May your choices reflect your hopes, not your fears” – Nelson Mandela.
(The author is Lead Sponsor, First Water Capital Fund (AIF))
(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)