Welcome the Bear Markets!

Although we saw a furious short-term rally last fortnight, we have entered into official bear markets territory as of early this month. (In the US bear markets are defined as a drop of 20% or more from a previous high.)

This is a good thing. Smart and Legendary investors understand this. Ordinary investors don’t.

If you haven’t spent much time buying stocks getting excited about a bear market doesn’t just sound counter-intuitive, it sounds nuts. After all, how can you feel appreciative watching the value of your life-savings grind lower? Life was so much fun when you were buying at 19000 and the index went to 21000 was it not?

However, if you are an investor, think a few months ahead. Or even years ahead. Think of Viswanathan Anand as you financial advisor! The kind of returns that you can get after a 30% fall in the market is phenomenal. Do not trust me. Ask your investor about a paper made by Mr. Prashant Jain of Hdfc mutual fund. That document is available on the Hdfc mutual fund site and in the inbox of your advisor. Since I was not sure about copyright issues, I did not reproduce it here.

Every stock investor knows that you’re supposed to buy low and sell high. Bull markets give you a chance to sell high. Bear markets give you a chance to buy low. So if you are 22 years of age and are planning to buy stocks for the next 45 years, you need more bear markets than bull markets J .

If you want to prosper during the next bull market – the one that will propel the averages to new highs in the years ahead – MAYBE now is your chance to pick up some bargains. This is not to suggest that the markets have finished their fall. Maybe they will fall further, but hey investors – Don’t Let Bear Markets Scare You

Unfortunately, too many investors are lulled into complacency during bull markets and scared out of their wits in bear markets. So they do just the opposite, buying high and selling low. In fact a friend calls it a family hobby – buying high and selling low!

Yes, the market has fallen sharply over the past eight months – Jan to Aug ‘08. And it may fall further in the weeks ahead. Still, this is an enormous opportunity for long-term investors. Too bad most of them don’t see it that way.

We give too much credit to the guys with white skin – and that is stupid. Indian banks have not leveraged 1: 30 times like a Bear Sterns had done. Or like Lehman brothers or like Citibank. Reddy of RBI has not put 91 Indian institutions on “watch”. However, we have beaten down our companies by a similar margin as the American companies!

Read Dr. Jeremy Siegel, author of “Stocks for the Long Run, Read John Templeton, ….see how Warren Buffet and Peter Lynch have celebrated bear markets.

  • Remember 30% falls can be followed by 30% gains! However it can fall for some more time before it rises.
  • Take any rolling 7-year period over the last 30 years, and stocks have outperformed bonds.
  • Take any 10-year rolling period and shares have given a positive return even adjusted for inflation.

Bear in mind, no one when can tell you when the next bull market will begin, how long it will last, or how high the market will ultimately go.

At Berkshire Hathaway’s annual meeting in May, Warren Buffett said “I would offer you a significant sum of money if you could give me the opportunity for all of my stocks to go down 50% over the next month.” Why? He knows he owns great businesses. He would like to own them even cheaper.

During bull markets you hear “buy, they do not make stocks anymore” and in bear markets they tell you “sell, or at some time there will be no buyers”. Both are wrong. Completely wrong. Markets go up and go down. Do an SIP. That makes sense. Do it now. It makes more sense.

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  1. Bear markets have always made money albeit for few people. They dare to bare when everybody else is hiding under their shells 🙂

    But i guess its also difficult to find sectors & in turn companies which will catch investor attention (oops FIIs) for the next bull market.

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