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Dear Bear

October 11, 2008

After 8 months, 100 posts and seeing a full fledged bear market in making, its at times difficult to change the investment strategy which worked so well on bull markets and apply for constant profits in bear markets. I have often wondered for instance, why does everybody love a bull run.
Does everybody have such a fantastic grasp of socioeconomic principles?


I dont know, neither do I think so. But one extremely effective reasoning can be bull run is marked by a sheer increase in optimism. And what makes it feel even better is the positive feedback it generates.
Stock Market in essence can be seen as a positive feedback looped inside a larger negative feedback. The positive feedback gets into working once, optimism or pessimism increases beyond a certain level. It feeds itself through, thus generating more optimism or pessimism in the system. And hence bull runs feed on optimism and grows fatter. Which in turn generates the feeling, “good times forever”.

But all this hypothesis apart, I firmly believe, bull runs validate everybody. I don’t have to be a savvy technical analyst, I can very well buy a stock and hold and I will book a neat profit. I don’t have to be a canny fundamental guy, but I can always confidently ‘advice’ people and 9 out of 10 times, the stock will rise.
It validates. It validates people’s thinking, ego and desires. It makes everybody think, that he is the next Warren Buffett but with a twist, he knows economics too. πŸ™‚
This is my first bear market. And I will be honest with you, its painful. My portfolio which for its size held well, against the stemming fall, in the past few months, is truly bleeding now.

The bear hug is firm and its exacting. No doubt. But, these are times when I feel, lessons should be taken, in “dozens and quintals” !
Bear Market serves an important purpose. To correct the market and allow fresh participants to enter. But certain basic points which I take from my experience and would basically advice anybody.

  1. Come out of “This is the bottom” mode: A very strong indicator of a neophyte bear watcher is predicting bottoms. We can’t, absolutely can’t say, this is the bottom baby! Hence put the money through. No! I have once said, hindsight is often 20/20, meaning hindsight decision is always perfect. So why not use it? Once the market makes a bottom, and starts showing some improved technicals[not pullbacks, mind you!], call it a bottom and enter. You will save yourself a lot of psychological troubles and keep cash with you for longer.
  2. Cash is King: Cash is King. Perhaps the greatest marketing gimmick the Street has sold to us is staying invested is the key to wealth. After all, it ain’t their money they are talking about, are they? Cash is king and hence, you need to understand that staying invested is no fun, when the markets are in bear mode. Exit, Exit,Exit! Understand that having cash in your pocket is also a position and howsoever lipsmackingly attractive levels you bought, you need to book profits and exit. Which strongly brings me to the next lesson.
  3. Learn, Learn, Learn: Bull runs, unfortunately doesnt prepare one for dire circumstances and when such situations come, novices and experts alike either commit suicide or go bankrupt. And there also would be a grain of truth, if you believe that ‘yours truly’ hasnt always walked the talk on this point, but I seem to have learned my lesson[at least temporarily], that you should learn your lessons. I have learned, a strict stop loss is a must, I have learned risk management is a must, I have learned you need to control your greed and fear. Psychological distractions, better put. What did you learn?
  4. Involve Risk Management Strategies right at the beginning: Period. A lot of times, traders,investors and sideliners get to buy the shit, that in making money, strategy is 100%. Guess what? Is it 90%? No! Is it 80%, then? No! 75?,60?50? No, No, No. For making money, a strategy plays hardly a role more than 25-30%. The rest is strict, unfaltering risk management strategies. And mind, you, the risk management also involves personal management. Fear and greed are the biggest roadblocks one has to control. Once might not at the end, come out like a Buddha, [and neither you want to be] but as they say, you can atleast try.
  5. In War, prepare for peace. In peace, prepare for War: [Courtesy Sun Tzu],This is extremely important. Use a bull run to raise cash and in bear run, preserve it. Nothing lasts forever but you have to make your cash last. Look a little above than the rest, look a litte back and ask, yourself, is it too high,too soon. The good thing is, you have seen one bear run and if you have not invested then you will not really understand the pain but if you have, then you can use this to gauge against “inverted fundamentals”. But again, perhaps I am asking too much because, collective memory is short. And thus, crowds never make money.
  6. Take some rest : Yes, it helps in bear market. πŸ™‚
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2 Comments leave one →
  1. Paulraj Madasamy permalink
    October 11, 2008 7:13 pm

    hmm.. ill remember these..
    when i get the chance to actually have a portfolio of my own :P..
    lol..

  2. Soham Das permalink*
    October 11, 2008 7:35 pm

    πŸ˜‰

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