Do's and Don'ts in a Bear Market

A practical guide for long-term investors

Bear markets present unique opportunities for long-term investors to acquire quality stocks at reasonable prices. By managing your investments wisely, you can significantly improve your returns. However, missteps can undermine your performance.

This article offers a practical guide based on my experience. While there are many strategies to consider, here is mine to inspire or enhance your own.

Just to clarify, I am not suggesting that we are currently in a bear market, as this requires a 20% drop from the all-time high, and nobody can predict that with certainty. I am simply emphasizing the importance of being prepared to respond effectively during a bear market or periods of market consolidation.

Key considerations for a strategy

The strategy should depend on several criteria:

• Portfolio Size

• Investment Horizon

• Regular Cash Inflow

For instance, my investment horizon exceeds 20 years, and I can add about 1% of my portfolio each month for now.

The three commandments

1. You shall not panic sell

Panic selling can severely damage your returns. While you might recognize the start of a market downturn, predicting its end is impossible. Avoid selling in a panic to prevent significant losses.

2. You shall not buy every dip

Buying dips can be beneficial, but exhausting all your resources at the beginning of a bear market is unwise. Bear markets can persist for several quarters. Make purchases progressively rather than all at once.

3. You shall not fear too much

Embracing a negative market narrative can paralyze you. Maintain confidence to continue making strategic purchases despite market pessimism. Focus on fundamentals of the companies you are buying or the ones you want to buy.

A practical method

Here is the method I use:

1. Identify your watchlist

   • Select stocks you are interested in, whether new or already in your portfolio. Focus on companies with strong business models, competitive advantages, robust metrics, and promising total shareholder returns.

2. Determine buying zones

   • For each stock, identify 2-3 potential support levels using a combination of technical and fundamental analysis. I will share an article soon detailing buying zones for several stocks. Feel free to comment if you want me to analyze specific stocks and give my buying zones.

3. Allocate Funds Strategically

   • Assess how much money you can set aside for 3, 6, and 9 months. Distribute this amount across 5 to 10 stocks and their respective buying zones, resulting in 10 to 30 incremental purchases. For smaller portfolios, be mindful of transaction fees and adjust the number of purchases accordingly.

If the market doesn’t enter a bear phase, your existing positions will remain intact. If it does, this strategy helps you avoid two major mistakes: buying too early or not buying at all—unless you can time the market, in which case this strategy may not be necessary.

Additional tips

During bear markets, negative narratives are rampant, with many "experts" predicting doom for companies and the economy. Focus on fundamentals. If a company continues to improve its metrics, grows steadily, and offers positive outlooks, it should weather the storm. A declining stock price coupled with improving fundamentals is an opportunity, especially if this discrepancy persists.

However, if a company's fundamentals deteriorate, it is better to cut your losses early, freeing up capital for future opportunities.

Understanding bear markets

The current market downturn might just be a consolidation phase. It could develop into a bear market if it persists. Historically, the average bear market sees a 35% price decline and lasts 289 days. Since the extent and duration of each bear market are unpredictable, consistently buying at support levels, avoiding overvaluation, focusing on quality businesses, and preparing for various outcomes are efficient strategies.

By adhering to these principles and maintaining a disciplined approach, you can navigate bear markets effectively and position your portfolio for long-term success.