You vs. the bear market – how to win

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You vs. the bear market – how to win

 

Do you also have the feeling that you cannot do anything right with your investments at the moment?

Everything you buy, irrespective of how undervalued it is, falls even more shortly after you bought it. And worst of all for no apparent reason, no company specific news or announcements.

This is definitely been the case with me.

As I’ve told you recently my portfolio looks quite bombed out at the moment. Mainly because investments that were undervalued when I bought them declined even more and became even more undervalued.

The only advantage of the market decline is that I am finding a lot of really good companies available at outstandingly cheap prices.

But the same as you, something has been keeping me back from buying them.

I was wondering what that was when I received an e-mail from my friend Vitaliy Katsenelson with the catchy title You Are Not as Dumb as You Think that explained why I was hesitant to make new investments.

Bur before I tell you what the e-mail said first a bit of information on Vitaliy.

 

Vitaliy, originally from Russia, is chief investment officer at Investment Management Associates in Denver, Colorado and is author of a very insightful book called The Little Book of Sideways Markets (click link or picture for Amazon page).

I read the book shortly after it was published and found it really insightful and worth reading.

It will help you understand the current market better as it was written with the aim of helping the reader make money in sideways markets, in other words markets that essentially go nowhere over long periods of time apart from a few up-and-down movements.

 

Here is Vitaliy’s article as promised, it also has an excerpt from his book I mentioned above (emphasis mine). Also take a look at the link at the end of this article to a presentation Vitaliy gave for even more information.

 

Secular sideways markets are comprised of many cyclical bull and bear markets

[take a look at the chart below]. 

Though cyclical bull and bear markets can provide great buying and selling opportunities, our emotions will try to get in the way between us and the right decisions. Markets will constantly try to brainwash us into doing the opposite of what we should be doing.


Below is an excerpt from my book that will help you manage bear markets better. Good luck!


 


 

You Are Not as Dumb as You Think (Psychotherapy for Cyclical Bear Markets)

Lately I’ve been getting this nagging feeling that everything I touch turns to dirt. Every time I buy a stock that is already down a lot, the one that my analysis leads me to believe is cheaper than dirt, it declines more.

Did I completely lose my ability to value stocks? Did I start ignoring Will Rogers’ advice to buy stocks that go up, and if they don’t go up, don’t buy them?

No, I didn’t get dumber, and my stock-picking skills haven’t diminished. I was simply a willing participant in the latest cyclical bear market.
Bear markets make you feel dumber than you are, the same way bull markets make you feel smarter than you are.

Feeling dumb makes you do the opposite of what you should be doing. Fear and pain—yes, continued losses cause a lot of pain—are dangerous things because they can make you and me panic, lose confidence, and do the opposite of what we should be doing.

To alleviate pain we sell, we react, we default to the only asset that made us money so far in the bear market—cash! Cash is only king when other assets are princes. When you cannot find a stock with a long-term superior risk/reward profile, then cash is King with a capital K.

However, during a cyclical bear market, cash is slowly demoted to a prince as great companies are thrown out the window with the junky ones. You have to actively remind yourself of the eight-letter word T-O-M-O-R-R-O-W!  Yes, tomorrow. 

Think of the lyrics from the musical Annie:

When I’m stuck with the day that’s gray and lonely
I just stick out my chin and grin and say, ohhh
The sun will come out, tomorrow
So you gotta hang on’ til tomorrow

 

Of course, we don’t know if tomorrow is really tomorrow or five years from now. But investing is a marathon, not a sprint, and do not let the bear market turn you into a sprinter.

First of all, remind yourself that you are not as dumb as your portfolio makes you feel. You have occasionally bought a stock that made you money.

 

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This is what I do: I pull out a chart of a stock on which I made a boatload of money or one I sold for the right reasons before it declined. 

I do this with pleasure, trying to relive my smart days. We all have these stocks, the ones we nailed. We tend to forget about them during the bear market phase. But I suggest you remember them now, when you feel lonely and miserable, so you’ll have more of these names to remember in the future, since cash will not bring the pleasure of victory in the long run.

The cyclical bull market is still there; it is just hiding under the ugly sentiment of the cyclical bear market. Believe me, it will show its happy face. It is just a matter of time.

In a bear market, it is easy to forget about buying. Selling is a much easier decision to make. Every time you buy a stock you look dumb because it usually goes down afterward.

I recently bought a couple of incredibly cheap stocks and, of course, they declined. I don’t feel smart about these buys right now. However, a while back I analyzed these companies, figured out what they were worth, determined an appropriate margin of safety, and got my buy prices.

The stocks declined but fundamentals had not changed, so I bought the stocks. You cannot worry about marking the bottom in every buy.

My objective is not to buy at the bottom and sell at the top. No, my objective is to buy a great company when it is cheap and sell it when it is fairly valued. I suggest you do the same.

Will Rogers’ advice is great, but unfortunately I have yet to meet a human being who has figured out how to apply it in real life. No, you are not as dumb as bear markets make you feel. 

 

I hope the article has helped you to put the current market environment in perspective. It has certainly helped me.

If you liked this extract of Vitaliy’s book, here is that Amazon link again:  The Little Book of Sideways Markets

Vitaliy has also prepared a presentation on how to make money in sideways market that you can read here: Active Value Investing – Making Money in This Sideways Market.

Your sideways analyst

 

 

By | 2017-05-19T15:10:26+00:00 September 29th, 2011|Tags: , , |