Bear market opportunity for intelligent investors

ET 5/4/09


By Harjit singh sidhu, CEO & Executive Director, Delhi Stock Exchange


Presently the stock markets are passing through the bear phase. Though the markets have recently observed small bouts of recovery, yet we can not conclude that markets are emerging out of the bear phase. The stock markets across the globe may yet test lows, and in such an uncertain times investors are advised to be more cautious. They need to tread carefully and watch each and every move of the market with precision eye.


It is the retail investor who is always subject to torture and unjust behaviour of the stock markets. During the bull phase the retail investors burnt their fingers and were again caught unaware in the bear raid. It is normally said that you can safely ride a Bull, but you can’t not ride a Bear. But I am of the firm opinion that an intelligent investor can ride both. Bull and Bear phases are well known in stock markets and this cycle repeats every three to four years.


But this does not mean that investors should run away from bear markets. Rather it is the best time for an intelligent investor to pick up good stocks when these are available cheap at rock bottom prices.
But one thing is to kept in mind that investors should not follow the herd mentality either for buying or for selling the stocks. Warren Buffet rightly said that, “Stay away from the rampaging herd. If you don’t, you and your investments might get stampeded.”


But now since the herd is over, venture out smartly and take the advantage of the bear phase. The investor has to act swiftly and smartly. Market experts say that in stock markets: bulls make money, bears make money, and pigs always get slaughtered.


Retail investors should learn how to play in both bull raid and bear hug in order to make money from stock markets. Investors need not worry much about the macro level indicators like GDP growth, Forex reserves, oil prices, price index or inflation rate. They need to focus on the micro level parameters of the companies like EPS, PE ratio, sales, Reserves, production, profitability etc. These little things that are business specific to the companies matter more that the macro level parameters.


First of all, investors must understand what are the signs of the bear market phase. These could be significantly undervaluation of the stock, larger scale unemployment and job losses, bad news in the air, low retail investors participation, decreased media coverage, bankruptcies etc. To my mind all these factors are prevalent today and based upon these parameters, we can say that markets are passing through bear phase. Secondly, an investors should find in phase bear markets are running.


There are three phases of bear cycle. In first phase bull run is about to end and there is highly optimistic atmosphere in general investing community. In second phase, the markets decline sharply and investors run away form the markets. There is atmosphere of negative news everywhere. And in third phase, more and more bad news pore in, and investors dump even blue chip stocks.


Investors are advised to pick stocks at the end of third phase of bear cycle. To my mind the third phase of bear cycle is the best time for the investors to come in. An intelligent investor should grab the opportunity when there are signs of distress selling, and when the charts show upward trend in stocks. In the recent past we have observed the signals of distress selling and charts are showing upward trends. The investors are advised to look for fundamentally strong shares and enter the market with long term objectives.


The investors must also learn the art of emotions. It is rightly said that an intelligent investors must hope when there is fear all around, and must fear when there hope all around. Presently there is fear every where, and an intelligent investor must hope and grab the opportunity. Mind it when the stock markets fall, investors do not loose, it’s only the dis-investors who loose.


We must learn how to pounce on the stocks. Find the opportunity when a fundamentally strong share is available cheap, jut buy it. It is only the bear markets that give the best of opportunities and not the body blows. If the herd starts running away from good stocks, get ready to run towards them. So we can conclude by giving the following thirteen commandments to retail investors:


  1. Learn the art of controlling your emotions — fear & hope
  2. Have patience — wait for the last phase of the bear market cycle
  3. Learn to be disciplined — clear cut criteria on which stocks to buy and which stocks to avoid
  4. Focus more on micro level parameters — more specific to the business of the company
  5. Choose stocks with low PE ratio and high dividend yield
  6. Sell your loosing investments — do not hold those stocks which are still falling
  7. Don’t hold speculative stocks particularly in bear phase — avoid high beta stocks
  8. Enter the markets, when stocks are showing upward trends
  9. Avoid the stocks of those companies that switch their products quite often
  10. View the market downturns as the buying opportunities, buy only fundamentally strong stocks
  11. Cash is King. Do not just throw your all cash at once. Create your portfolio in proper intervals
  12. Concentrate more on Brick and mortar (time tested) stocks
  13. Invest in those companies stocks whose business you understand
  14. Baisakhi is round the corner, and to my mind bear phase is in its last leg, so select your portfolio carefully, invest intelligently and reap rich harvest.

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