Capitalizing on a bear market is much easier in theory than it is in practise. Weak investor sentiment and falling stock prices naturally cause many prospective buyers of undervalued businesses to become increasingly cautious.
However, the best buying opportunities generally come along during bear markets. In the long run, buying stocks while they are undervalued can improve your financial prospects.
The performance of the S&P 500 may fluctuate wildly from day-to-day in the near term. The index may even decline further before it recovers. However, looking at history, the index has always recovered and shown strong growth over the long term.
Buying and selling
Many investors continue to sell stocks at the bottom of a bear market for a variety of reasons. Some are understandably concerned about the prospects for the economy, while others may just need the cash.
Although the government and Federal Reserve have put a variety of measures in place to support the economy, the chances of a recession occurring in 2020 have increased dramatically in recent weeks. This may persuade investors to adopt a negative stance on the stock market, which could cause it to decline further.
However, one investor who has enjoyed success in buying stocks during such periods is Carl Icahn (Trades, Portfolio), who once said, “My investment philosophy, generally, with exceptions, is to buy something when no one wants it”.
Since the stock market’s track record shows that it has always managed to recover from its price falls, following Icahn's advice at the moment could be a logical move for investors to make. In the long run, economic growth and improving investor sentiment look set to return. Investors who buy before those changes occur may be among those who benefit the most from a recovery.
Patient investing
The time it will take for the economy and stock market to recover is highly uncertain. Past recoveries have varied in terms of their severity and the amount of government and central bank stimulus that has been used to catalyze the economy’s performance.
Therefore, a quick recovery from the current bear market is not guaranteed. This is unlikely to dissuade value investors such as Warren Buffett (Trades, Portfolio) from buying stocks. According to the Oracle of Omaha, “Someone's sitting in the shade today because someone planted a tree a long time ago”.
Through adopting a long-term standpoint regarding the stock market’s recovery, you can buy undervalued stocks today and have the required patience for them to deliver on their potential.
Expecting a quick turnaround from your holdings may lead to unrealistic return aims. Those investors who adopt a multi-year time horizon could be in the best position to capitalize on today’s low valuations.
Stock market volatility
The uncertain economic outlook is likely to cause a period of exceptional volatility for the stock market. This can cause investors to obsess over the day-to-day stock price movements of their holdings. It may even induce speculation, rather than investment, from individuals who try to make a quick buck on the market’s short-term price movements.
According to Benjamin Graham, in this scenario you should, “Invest only if you would be comfortable owning a stock even if you had no way of knowing its daily share price”.
Through buying for the long run and not focusing on short-term fluctuations in stock prices, you may find it easier to invest successfully in a bear market. This strategy may enable you to look beyond the stock market’s uncertainty while news flow is weak, and instead concentrate on buying quality businesses that have growth potential while they offer wide margins of safety.
Read more here:
- 4 Tips From Peter Lynch to Help You Overcome Market Uncertainty
- Charlie Munger's Tips on Controlling Your Emotions in a Crisis
- How Benjamin Graham's Advice Can Help You to Capitalize on This Market Crash
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