Investing in bull markets is simple. Just buy and hold. Anyone can do that. But investing in a bear market is tough. Here are 9 rules that will help you weather the crash, not necessarily unscathed, but in a much better condition than many other investors.
Don’t be in a state of denial. It’s like those investors in 2008 who were constantly reassuring themselves “this is not a bear market, my portfolio will be fine”. Once the S&P 500 is down 100 points, it’s time to acknowledge the crash. Don’t stay in denial, because that will cost you a lot of money.
Forget about rationality.
In a stock market crash, there often is no rationality left. Investors are panicking! Hence, your technical analysis or fundamental analysis won’t work in the short term, because investors have lost rationality.
Don’t bother listening to the stock analysts.
Forget about individual stock pickers who love proclaiming their picks. In times of panic, 99% of all stocks move in the same direction. Investors who are looking at individual stocks need to realize that in times of panic, the macro factors tend to override individual stock earnings or corporate reports. There are times to understand what’s going on in your individual stock, but not in times of panic.
Don’t listen to the financial firms on Wall Street.
Investing is a zero sum game. Only by lying and cheating the public can those major financial firms on Wall Street make vast profits. Remember that firms like Goldman Sachs and JP Morgan aren’t in the business for your best interest. So the next time they say “buy now, on the dip!”, don’t listen to them. Don’t listen to their “buy now, because prices are low!” advice, because prices can (and probably will) fall a lot lower. Major financial firms have a tendency to urge investors to buy high (on the long side) and sell low.
Understand your goal.
During a stock market crisis, what’s your goal? Is your goal merely to protect capital? Or is it to make huge profits off the crisis. If all you wish for is to protect your investment capital, why not go 100% cash? If your goal is to make money, then go with the trend. Never fight the trend (which is DOWN in a stock market crash), because you’ll simply lose money.
Pay attention to sentiment more than fundamentals and technicals.
Fundamentals and technicals usually don’t work in financial crashes, because investors are no longer thinking rationally. Sentiment, however, reflects perfectly the irrationality of other investors, hence is very useful for predicting the future movements of an irrational market. Is everyone in the markets screaming in desperation? Is there utter fear?
Don’t bother attempting to catch the bottom.
Unless you have God’s cellphone number, the chances of you catching the bottom of any stock market crash are 1 in a million. If you try catch the bottom, you’ve just found a fast way to the poorhouse. Remember that in bear markets, it’s “when will the stock markets rebound”, not “at what price will the stock markets rebound”.
Things that have never happened before can happen now.
Remember in 2008 when the pundits were screaming “There’s no way Lehman can collapse, they’re a 100 year old firm!” And then what happened? Lehman went bankrupt. In major bear markets, anything can happen. Do not get the notion that “there’s no way this can happen!” because it most certainly can.
Don’t be too stubborn with your estimates.
It’s ok if you say “my estimates show that stock XYZ will stop falling at $20”. But don’t be overly assertive and arrogant about it. There’s nothing wrong with making estimates (after all, that’s all we as investors do!). The markets tend to oversell beyond anyone’s imagination in a crash, so keep in mind that your analysis of the markets may be wrong.
Keep these rules in mind, and you’ll be well off when the next stock market crash comes.