Warren Buffett has given us two golden rules: Rule 1- Never lose money, and Rule 2- Never forget the Rule 1! But those who deal in the stock exchange knew it very well that trading is all risk to get some gain, and when we lose, we lose every gain. Yes, trading in the stock market is a risky game of fear and greed. When the market falls, fear prevails and when the market goes high, greed takes over. So the question remains: How to deal with the ever-changing stock exchange? The answer is, stay invested till you get value for your invested money in the right companies.
Bulls are Here, Bears in Waiting
Historically, January 2018 was the luckiest month for the traders and investors alike as top stock exchanges of the world Dow (USA), and Sensex (India) have touched the all-time high figure. However, the global markets are in the bull phase since the last three years and as time advances, the bulls are getting more aggressive and confident. No wonder that investors, as well as traders can make money easily during a bull market, but then, we can predict neither peak nor bottom of the market. Therefore, it is always wise to book profits at a regular interval. If medium-to-long term investors follow this practice, there is no reason to worry when the tide turns.
How Bull and Bear Phases Work
By default, the thriving bull market can give higher prices even for the penny stocks. No traders book loss during the bull market if they can control their greed. Yes, the bull market promotes greed and people start parking their money almost blindly in the stock markets with the expectation of having a huge profit. As mentioned above, the stock exchange rides on fear and greed. So, after greed comes fear. Cyclically, when valuations are so high that fail to maintain a subtle balance between PE (Price to Earnings) ratio, the fear start prevailing in the market. In simple terms, when valuations are so pricey that they cannot justify the revenue and profit of the business, people start thinking whether the rally would sustain.
There, we reach the origin of fear and the bear market. It is said that traders should come out of the market when the small companies’ shares become costly and compete with midcap companies’ shares in price. It is because the shareholders or traders of the small companies cannot keep the shares with them for a long time, and if they get even a small profit, they tend to sell them immediately. On the other hand, the falling share prices of midcap and large-cap companies also cannot support the market and eventually, the bears tighten their grip on the market.
You may raise a question: How can investors sustain the bear phase? Or, why investors have a little or no impact of the bear market. Here are the four aspects that help investors face the bear market:
1. They can stay invested- The bull or bear market has a major impact on short-term traders or financial speculators. Such people cannot hold their investment even for a medium-term or till the correction phase of the market. Investors, on the other hand, can remain invested for a long time in the market that provides them a shield against volatility and correction phase. Investors do not get panicked for a short to medium-term downward movement of the market, and when the trend reversal occurs, they can start reallocating their portfolio.
2. They can accumulate- Okay. This is perhaps the biggest advantage of bear market for the investors. They can accumulate shares of fundamentally strong companies at cheaper valuations, and also add shares in their portfolio for averaging. Many long-term investors use the bear market to increase their wealth. The stock markets always give higher returns to the investors because they can add selected stocks during the bad times of the market whereas traders and punters remain inactive during this period.
3. They are free from selling pressure- For traders, from small and medium to large scale, the selling pressure looms large when there is a weakness in the market. They have to face margin issue and other factors that keep them on the edge. But investors can work on long-term investing strategies without any selling pressure, and therefore, they can have a little or no adverse impact during the bear market.
4. They invest in value stocks- The value stocks are typically defensive stocks. Although their movement is slow due to a less volume, they are safer bets as compared to the growth and penny stocks. As these value stocks follow a specific pattern irrespective of market movement, they can remain firm during the high volatility. Most of long-term investors have a few value stocks in their portfolio that give it a cushion during the fall in the market.
The stock market rewards the patience and courage. If you have a confidence in a particular company’s management, business model, and future, you can buy that company’s shares. But then, as an investor, you should not expect any overnight gain because volatility is an inherent quality of the stock market. Like other markets, if you want to earn a profit, you require a proper planning and a medium to long-term approach.