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Sri Lanka Equity Forum » Stock Market & Forum Help » Understanding bear markets

Understanding bear markets

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1 Understanding bear markets on Tue May 17, 2011 8:13 am

gann

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Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
What they are, how they work, and what they mean for your investments

What is a bear market and what causes it?
By definition, a bear market is when the stock market falls for a prolonged period of time, usually by twenty percent or more. It is the opposite of a bull market. This sharp decline in stock prices is normally due to a decrease in corporate profits, or a correction of overvaluation (i.e., stocks were too expensive and fell to more reasonable levels). Investors who are scared by these lower earnings or lofty valuations sell their stock, causing the price to drop. This causes other investors to worry about losing the money they've invested, so they sell as well; the vicious cycle begins.

How does a bear market affect my investments?
Generally, a bear market will cause the securities you already own to drop in price. The decline in their value may be sudden, or it may be prolonged over the course of time, but the end result is the same: the quoted value of your holdings is lower. This leads to two fundamental principles:

1.) A bear market is only bad if you plan on selling your stock or need your money immediately.

2.) Falling stock prices and depressed markets are the friend of the long-term, value investor.

In other words, if you invest with the intent to hold your investments for decades, a bear market is a great opportunity to buy. It always amazes me that the "experts" advocate selling after the market has fallen. The time to sell was before your stocks lost value. If they know everything about your money, why they didn't warn you the crash was coming in the first place?

What do I do with my money in a bear market?
The first thing you need to do is to look for companies and funds that are going to be fine ten or twenty years down the road. If the market crashed tomorrow and caused DIST stock price to fall 30%, people are still going to drink GAL. The basics of the business haven't changed. This brings us to our third principle:

3.) You must learn to separate the stock price from the underlying business. They have very little to do with each other over the short-term.

When you understand this, you will see falling stock markets like a clearance sale at your favorite furniture store; load up on it while you can, because history has borne out that prices will eventually return to more reasonable levels.

2 Re: Understanding bear markets on Tue May 17, 2011 8:33 am

Antonym

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Vice President - Equity Analytics
Vice President - Equity Analytics
@gann: Thanks for this excellent advice! People should read this twice, slowly - especially Point No. 3...

3 Re: Understanding bear markets on Tue May 17, 2011 9:10 am

ShareShares


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
@Antonym wrote:@gann: Thanks for this excellent advice! People should read this twice, slowly - especially Point No. 3...


You must learn to separate the stock price from the underlying business. They have very little to do with each other over the short-term.


Does that mean coming trend is more important than corporate results of individual shares and groups?

4 Re: Understanding bear markets on Tue May 17, 2011 9:26 am

Antonym

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Vice President - Equity Analytics
Vice President - Equity Analytics
@ShareShares wrote:
@Antonym wrote:@gann: Thanks for this excellent advice! People should read this twice, slowly - especially Point No. 3...

You must learn to separate the stock price from the underlying business. They have very little to do with each other over the short-term.

Does that mean coming trend is more important than corporate results of individual shares and groups?
That depends: If you are a short-term trader, the trend is your friend. If you are a long-term investor, business performance matters more.

5 Re: Understanding bear markets on Tue May 17, 2011 9:38 am

wis


Manager - Equity Analytics
Manager - Equity Analytics
When the prices go down, you don't know where the bottom is. It could have been 250 before. At 170 people will say it's a very good price. 165 bargain. 160 hmm, good. 150 Sad. 140 Surprised. 130 _

And the most important thing is 'money is limited' everybody says this is good price to buy. But where's the money unless you're a fraudster?

6 Re: Understanding bear markets on Tue May 17, 2011 11:37 am

Leo_pold

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Manager - Equity Analytics
Manager - Equity Analytics
Thanks gann, I gave you + rep.. (just figured out how to give rep ) Smile

7 Re: Understanding bear markets on Tue May 17, 2011 12:07 pm

gann

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Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
@ShareShares wrote:Does that mean coming trend is more important than corporate results of individual shares and groups?

A swing or day trader does not care about the underline business. They are only interested in the short term price momentum. If the trade does not seem to go in their favor they have to bail out immediately.
An investor does not care much about the short term price fluctuations if he can ascertain the future earning power of the business.

You might prefer being both a swing trader and an investor when committing huge sums. So in case the swing trade does not go in your favor at least you are cushioned by the fact that the long term prospects look promising. Latest examples I could think of being BRWN and TKYO. You could liquidate 50% of the stocks and take out profits if the swing trade went your way, just when the trend shows signs of weakness. So you are not trying to catch falling knifes nor playing casino.


8 Re: Understanding bear markets on Tue May 17, 2011 12:43 pm

Soundchips


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
so , june is un predictable ?

9 Re: Understanding bear markets on Wed Dec 28, 2011 4:51 pm

Kumar

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Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics
@gann
Thank you so much.

10 Re: Understanding bear markets on Wed Dec 28, 2011 5:20 pm

bakapandithaya

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Vice President - Equity Analytics
Vice President - Equity Analytics
@gann wrote:What they are, how they work, and what they mean for your investments

causes other investors to worry about losing the money they've invested, so they sell as well; the vicious cycle begins.

In other words, if you invest with the intent to hold your investments for decades, a bear market is a great opportunity to buy. It always amazes me that the "experts" advocate selling after the market has fallen. The time to sell was before your stocks lost value. If they know everything about your money, why they didn't warn you the crash was coming in the first place?


All of our forum members should understand this. Thnkx for sharing

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