When it looks like a bear market is arriving: rule number one: don’t bury your head in the sand
Make a plan which may include some form of mitigation, selling highly rated stocks and action that plan.
My way of dealing with the bear: well firstly we have a very good 2-minute blog from WheelieDealer discussing bear markets: that’s well worth a read. I will not really add to that other than to offer my experiences following very significant bears I have invested through over the last 20 years.
What I have learnt is that for my mindset the preferred action is to take some degree of risk mitigation as it becomes more and more obvious that the bear is taking a grip on the market. Remember in the early stages of what develops into a bear market, you just don’t know the bear is really there for sure. It usually starts with an overall index decline that may occur in steps downwards with little climbs back upwards but the overall trend as displayed by the likes of the decreasing 200day MA will suggest that the bear is about to go walk about. For the FTSE all share (ASX) the 200day MA started to suggest a downward trend was starting from around mid-September 2015 but like all indicators, it’s very easy looking backwards.
Differing definitions of when a bear market starts and how long it runs for exist but for ease of understanding I tend to measure duration form the nearest obvious sustained high of an index. If we look at the FSTE all share (ASX) you could argue that we have been in decline since July/August 2015. Whatever the starting point, what is obvious is that we are now living with the bear and he is having a good old stomp around. So, a few rambling thoughts on the bears that I have lived with:
Back in 1998 after a three-year climb of 100% in the FTSE100 everything happened so fast there was hardly time to react. The bear must have been on a bonus as he got his job done in 50 trading days taking the index down some 25%: yet in truth, little harm was done as the markets recovered rather quickly. Good companies remained good companies and at the same time many “no-hopers” were born. Within nine months of the start of the 1998 bear market, the FTSE 100 was at a higher value than when Mr Bear first started his stomp.
1998: What did I do? Well nothing really, a lot of my stocks were very Jim Slater inspired and I continued to seek opportunities from those massive Company REFS manuals. Surprisingly I sailed through but did sit down some months afterwards and ask the question would I be so lucky next time.
However, 2001 was a different matter. The markets had become over optimistic and everything carrying a .com becoming grossly overvalued. We then went into a long period of decline lasting two years until we benefited from the Baghdad bounce in 2003.
2001: What did I do? Well, fortunately, I had a plan in place and when it became clear that the 200day MA was in a sustained decline, I sold down lots of stocks and although on reduced profits, stayed in pretty good shape to fight another day. In my view, the important thing I did was to realise after a fairly significant fall that things could get a whole lot worse. I should say that leading up to 2001 I had made some very decent profits yet never really got involved with the .com stuff as I just could not readily see where the profits would come from for those masses of companies.
Just as before after the 1998 bear, we had a very sustained period of a bull market; it was a really good time to be investing. As usual, I never got in at the bottom or out at the top of anything but a compromise is just fine with me.
Things were going along nicely and my portfolio was stuffed full of apparently quality companies that paid very good dividends. PYAD had suddenly become the flavour of the time with banks and life insurance offering excellent dividends. We then started to see things going adrift somewhat with the new phrase “toxic debt” being talked about all over the news. I swear that the news agencies or banks just did not have an utter clue what toxic debt really was!
2007/8: What did I do? Well as previously the 200day MA was suggesting that all was not well. I started to get more cautious and sold down some stocks yet I just could not believe the like of Northern Rock & Lloyds could be in trouble and I actually did some topping up in September 2007 but very rapidly sold within a few days realising my mistake. As the decline set in I moved very heavily into cash, around the 80% mark. I had done a couple of sillies yet thankfully admitted when I was wrong and escaped with a fair percentage of accumulated profits; reduced profits but I felt happy to only have a 20% exposure to the ongoing carnage.
When the bear finally ran out of whatever it is bears feast on, the markets turned up but I had temporarily become a hesitant and possibly over-cautious investor. I was getting back into quality stocks, good returns on capital and good FCF but I still held probably too high a percentage of my folio in cash until I was absolutely sure that pesky bear had gone away.
So after all of this, what are our options in a bear market?
Well, firstly I would say don’t bury you head in the sand and just pretend nothing is happening.
The options as I see them are:
2015/15: What have I done? Well I have applied the lessons learned over the previous bear markets and heavily deployed my preferred strategy of risk mitigation. I started selling down some stocks in December with 200day MA of the fTSE100 looking to be in a continuous down-trend and the worries over, oil, China etc. That sell off gathered pace in the first half of January and I now am now around 70% cash. It may well prove to be the wrong decision but it’s one I feel comfortable with. When the markets do recover and some degree of confidence returns, it may well be we are granted the freedom of the chocolate factory all over again!
Welcome to my Blog Page - I hope you find my whittling on to be of some interest. I am a private investor who is happy to share thoughts on the market and individual stocks. Please remember that I am definitely not offering tips or investment advice.