Never Miss A Bear Market In Your Life!!!

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May 30, 2021

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Strategic Alpha

What is a bear market?

 Bear markets are markets where the prices of shares fall – in many cases, quite sharply. There is widespread negative sentiment in a bear market. 

Markets tend to follow a cyclical pattern. Bull markets, where the prices of shares rise, are followed by bear markets. Bear markets are again followed by bull markets. So, what do you do in a bear market? When you know that bear markets are followed by bull markets, you buy good stocks in a bear market.  

There have been many bear markets in the past. A very old example of a bear market is the one that followed after skyrocketing prices in the early ’90s. The bubble burst when the securities scam came out. Another one of them was the bear market that followed after the dot-com bubble burst in 2000. One more one is the 2008 financial crisis, which happened after the subprime bubble burst in the USA. The most recent one is the bear market in the early part of 2020. 

Let’s take a look at one of the biggest bear markets – the 2008 financial crisis. The Sensex crashed from a high of 20873 in January 2008 to 8160 in March 2009. It fell by around 60% during this period. Let’s see what happened in a little more than a decade after that.

As we can see from the above chart, Sensex went up by more than 400% in a little more than a decade after the crash caused due to the global financial crises. If you had invested in good stocks during the bear market of 2008, you would have done well in the bull market that followed. 

Many stocks have given multibagger returns if you had invested in the bear market of 2008. Let’s see some examples of stocks that became multibaggers if you invested in the bear market of 2008/2009.

Multibaggers in 10 years (2009-2018)
Company CAGR
Bajaj Finance 83%
Asian Paints 46%
Kotak Mahindra Bank 29%

If you had invested in the bear market after the dot com bubble, you would have found good companies from the capital goods sector such as Siemens and BHEL to invest in, Siemens and BHEL, becoming 10X in 5 Years.  In the period from 2003 to 2007, infrastructure major Larsen and Toubro delivered multibagger returns delivering around 20X in 4 Years.

The same concept of not missing out on a bear market applies to sectors too. For instance, if a person invested in steel stocks in the bear market of 2020, the stocks would have done well. From the lows of March 2020, steel stock SAIL has delivered absolute returns of more than 500% up to mid-May 2021. Another stock that has given multibagger gains since the bear market of 2020 is domestic appliances maker Butterfly Gandhimathi Appliances. From April 2020, it has delivered absolute returns of more than 600%.

A bear market does not necessarily mean a full-blown market crash like the 2008 crisis. There have been smaller bear markets in the period from 2009 up to 2020. Let’s take the example from early January 2011 to the later part of December 2011. Sensex corrected by around 26% during this period. Buying good stocks during this period would have given good returns in the subsequent years.

Now, what do some investors do in a bear market- they make 2 mistakes. The first mistake is that they may not invest in a bear market. They may be blind to the opportunities prevailing in a bear market. The second one is that they may liquidate their stock holdings in a bear market. As they are gripped by panic and fear upon seeing falling stock prices, they might sell their stocks.  These two mistakes need to be avoided by investors.

Bear markets are inevitable in the life of every trader/investor. No trader/investor can escape a bear market. Traders/investors need to keep calm when they face a bear market. As long as Business Fundamentals are Intact, We should do nothing, when nothing has to be done, Knee jerk reactions in response to a bear market have to be avoided. Keep following the approach that works for you and stick to your circle of competence. Investors need to be patient in a bear market as it may take some time for a bear market to reverse and turn into a bull market.

The key learning for investors is that they need to look at the bear market as an opportunity rather than a threat. Bear Markets provide you with great opportunities to invest in deep value Stocks.  Rather than being fearful and scared of the bear market, it is an opportunity to accumulate good stocks.

 Even during Covid Led bear Market, Whoever saw it as an opportunity and acted upon it, created fortunes for themselves where they stuck to their circle of competence and invested in the businesses where they had a better understanding. During the Last bear Market which started in March 2020, I wrote a blog “Corona Virus Scare in Markets?- Opportunities are Often Born in the Fogs of Uncertainties.

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The author of the blog Mr.Suyog Dhavan is a Full-time Investor / Value Trader and Value investing/Trading Mentor. His style of Investing is inspired by Mohnish Pabrai, Peter Lynch, and Porinju Veliath. He is the founder of Strategic Alpha Wealth, A Premier stock market mentorship firm with a mission to touch the lives of 1Lakh people through its mentorship program.

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