Your bear market survival guide

John Addis from Intelligent Investor shares seven points to consider if you are thinking about investing during a crisis.

The Covid-induced market collapse is serious. As a friend said recently, “It’s just like the GFC, except I might die.” People are losing their livelihoods, their businesses, and some are losing their lives.

The second order effects – small businesses going under, rapidly rising unemployment, supply chain breakdowns and a laundry list of government interventions to address them – only add to the sense of chaos.

The above combination isn’t an ideal environment in which to make investment decisions but, as the saying goes, a lot of that is priced in.

Here are the seven points to consider.

1. Panicking doesn’t help

Loaded with emotion and paper losses, bear markets are tailor-made for poor decision making. But there are ways to make bear market investing less error-prone.

Businesses are complex so it’s easy to get waylaid by facts and figures that add nothing to your decision making. If you can’t enunciate the top three or four reasons why you’re buying or selling a stock then there’s a good chance you don’t understand the key issues around it.

Writing those arguments down will help, as will having a hit list of stocks you’d like to own and the price you’re prepared to pay for them. That makes the decision to buy and sell almost automatic.

2. Things will be clearer (after prices have gone up)

The first connection to make is between extreme uncertainty, extreme volatility and what that means for your attitude towards capitalising on it.

It’s certainly possible that, without many planes landing at Sydney Airport and the third runway given over to a car boot sale every Sunday, the company will default on its debt. With Sydney Airport’s share price falling 48% in eight weeks, that risk needs to be balanced against the opportunity.

As a rule of thumb, if you want to buy cheaply, you may have to embrace uncertainty. Without uncertainty, you don’t usually get cheap prices.

3. Deploy your cash (slowly)

This time is different. Some say this could be as bad as the GFC but it might be far worse. The wartime analogy works in one sense – private assets will be requisitioned to fight the virus, a physical and economic threat to our lives, as will the full resources of the state.

But unlike in wartime, which often creates full employment, this is having the opposite effect. None of us have seen this before, which is why the uncertainty, expressed in huge daily price movements, can feel so overwhelming.

No one has any idea how much share prices can fall or bounce in this environment, which is why we have long recommended a policy of taking an initial position and adding to it as time passes. I personally suggest you consider buying in parcels and average down your purchase price when prices fall further, slowly building your stake.

4. And hold some back

There are potentially hundreds of stocks that might need to raise capital in coming months. Some will be great opportunities and you might want to keep some cash for them.

5. Sell cheap for cheaper (without sacrificing quality)

If you don’t have much cash to put to work, selling one cheap stock to buy another that’s even cheaper could be sensible depending on your personal situation. Consider aiming at all times to have the most undervalued-portfolio of stocks.

There are, however, two provisos. First, try and avoid over-trading. If you’re making wholesale changes to your portfolio then you’re probably making mistakes, although it may please the tax man. Second, be careful not to sacrifice quality for numerically cheaper stocks.

6. Don’t beat yourself up when you’re wrong

Making a commitment to improve your decision-making in a bear market doesn’t mean all future decisions will be good ones. Good decisions come from experience; and experience comes from bad decisions. To get better at things, first we must fail. Accept it, learn from it and move on.

7. Pick flowers (not share price bottoms)

This is not an easy time in which to make any decision at all, let alone ones that relate to money. Try and find pockets of normality in which to retreat, riding a bike in the forest, lolloping around the garden with a spade looking for cane toads, or cooking (badly). If an activity quietens your mind and prevents over-trading, that’s a good thing.

When a bear market strikes, you need to act rationally. That might mean getting rid of any stocks playing with your emotions in favour of buying the cheapest and safest stocks, or it might mean buying stocks that you’d never considered before and selling cheap stocks for ones that are cheaper still.

Either way, bear markets can be a great opportunity to change your financial life. Don’t waste it by letting emotion drive your action.

About John Addis

John Addis is editor and founder of Intelligent Investor, which provides in-depth value investing analysis of ASX listed companies.

Main image source: BsWei (Shutterstock)