9 June 2015
Bull and bear markets are equally good grounds for a profitable investment game. As an astute investor, play that investment game smartly in both the markets for maximising gains and minimising losses.
Smart investing is understanding ground market realities and tailoring investment strategies accordingly. Canny investors use bear market phases to add value to portfolios and prepare the ground for launching suitable offensives later during a bull run.
Intelligent investing means winning, whether the market is bullish or bearish. To keep winning, investors need to be objective and avoid being emotional. Here are some win-win strategies for riding high even during a painful bear phase.
Preserve your capital first
First of all, take all the right decisions and make all the right moves to achieve the immediate goal of preserving the core capital, the basic corpus, in a bear market. So, avoid the temptation of playing enthusiastically in short-lived rallies. Invest only in intrinsically sound stocks, not in one go, but accumulating them at every decline.
That calls for drawing up a list of must-acquire stocks. Prioritise stocks within that list. Then invest in them, in small lots, whenever there is a major decline in the market. Dollar cost averaging is not recommended. But, reduce the cost of the overall portfolio by capitalising on short-term market fluctuations.
Avoid being trapped by Dollar Cost Averaging
Averaging is an old risk minimisation concept. When a favourite stock is on the slide, acquire additional quantities of that stock at every decline. The logic: the cost of acquiring the entire lot dips below the highest quote.
However, do not blindly follow this concept of Dollar Cost Averaging. If you go on acquiring additional quantities of a stock at every fall, though the overall cost of acquisition dips, you are sure to be deprived of juicy profit-making opportunities. Possible that the stock may quote lower later, lower than the average acquisition cost.
So, do not play the game of Dollar Cost Averaging in a bear market.
Avoid investing in laggards
Even in a bear market, there may be sporadic rallies in select stocks. Quite often, these stocks are backbenchers and laggards that rally in a quick flash and die out equally faster. Such things happen every trading day.
Avoid these shooting stars. For, most often investors get in when such stocks have already moved up and these short-sighted investors are not able to get out when those stocks dip down. Thus, all those investors are denied of exit opportunities for long.
So, invest only in frontline stocks, which make moving in and out easier. Frontline stocks offer tremendous flexibility to a portfolio. It is a must to have flexible portfolios when bears are having a party.
As an extension to this concept, invest only in defensive stocks and sectors. That should help insulating the portfolio against major losses during strong bearish spells.
Choose the right market
When the indices are on a slide, there could be a payment crisis. If such a crisis strikes the bourse your broker is attached to, you may not get your payments in time. Or, you may not get the delivery of stocks acquired.
So, choose the right market, the right exchange. That right market is the one which boasts of a robust trade guarantee fund and an iron-clad safety-security mechanism. Only such markets can protect even small investors during crisis.
While choosing an exchange, be sure about its settlement cycle, delivery standard, pay-in and pay-out cycles. Bone up on its technology architecture and make sure it has a technology to stand by in case of breakdowns and crisis.
Choose the right broker
Choosing the right broker can help you avoid heartaches in a bear market. Zero in on a broker who can put your deals through without delay and get you out quickly when needed. It is a must to deal through a broker who can get you in and out with ease.
The broker for you is one who is resourceful, has a strong technology network and boasts of a wide network of fellow brokers and sub-brokers. Not having such a broker means inability to exit at the right time and sinking into a quagmire of losses when the going gets tough.
If your broker is active, aggressive and clued-in, still better. If he is able to guide on exit timings, even bearish markets can bring in gains for investors.
It is that simple. Choosing the right broker is as important as choosing the right stock. You might choose the right stock, but if you do not have the right broker, all stock-picking efforts, skills and strategies are sure to come to a nought.
Diversify, diversify and diversify
To use the risk-reduction cliché, do not put all your eggs in one basket. Keep the portfolio always diversified. Avoid the temptation of throwing all your bets behind one horse.
For instance, when tech stocks ruled the roost, they looked irresistible for many short-sighted investors. These investors closed their eyes and placed all their bets on tech stocks. When the tech meltdown hit the bourses with the speed of an avalanche, all such princely investors turned paupers quickly.
So, diversification is the game to play, more so in a bear market. And what better time than a bear market to effect desirable changes in your portfolio and make it really diversified.
But, remember, do not diversify recklessly. Spread your corpus over just four or five sectors. That is how you insure yourself against sectoral vicissitudes and minimise sectoral risks. Even within a sector, no single stock should have an exposure of more than 10 per cent of the sectoral corpus.
If the exposure to a particular sector crosses the ideal limit, whittle down your exposure to the desirable limit and spread your risk over some potential turnaround sectors. Include promising greenhorns and reduce the concentration level of the portfolio.
Do not get carried away by rumours and opinions
Rumour–mongers thrive in a bear market. Do not get taken in by rumours and self-styled informed opinions. Quite often, these crumbs of rumours and morsels of unauthorised information are nothing more than desperate short-term attempts to trigger rallies in select stocks.
So, never act on rumours. Turn a cold shoulder to hot tips. Do not chase frantically the proverbial pot of gold. Invest prudently, pin your hopes on diligent research and develop a long-term outlook. Set a benchmark annual return for yourself and be contented when you earn that return.
Shun pie-in-the-sky concepts
With an eye on manipulation, some unscrupulous brokers publicise fancy concepts. Do not get impressed by them. Remember the scamsters Harshad Mehta’s Replacement Cost concept and Ketan Parekh’s K-10 concept.
Remember these concepts cannot be the sole drivers of stocks. Moreover, markets discount such factors anyway, much before their orchestrated publicising. Respect the adage “the market knows the best”. Never get influenced by fancy investing concepts.
It has been observed that when manipulators prop up stocks by publicising pie-in the-sky concepts, bonafide investors manage to enter only at the fag end of that artificial rally. By then, manipulators have moved out having made their money, leaving gullible investors high and dry.
Do not overextend
In a volatile bear market, play the investing game safely. Do not overextend and never borrow to invest in such a market. Here are a few tips to avoid risky overextending.
One, stay away from leveraging personal assets to bet on rumoured horses. A bear market is more unpredictable than a bull market. It makes no investment sense to borrow at 18 per cent to 24 per cent to earn a return that is not certain. Borrow to invest in a bear market and run the risk of losing not only the basic capital, your personal wealth as well.
Two, do not bite more than what you can chew. Buy only as much as you can take delivery. Be prepared to take delivery of the stock you have bought, if the stock slumps down. So, what and how much you should buy in a bear market should be based on how much risk you can bear and whether you can take delivery if there is a further downslide.
Do not latch on to untested profit concepts
Certain profit-making concepts appear good even in a bear market. However, such concepts need to be tested under scrip-specific circumstances.
Consider this example. Whenever there is an open offer at a price higher than the prevailing market price, there lies an arbitrage opportunity. For, the market price tends to move up closer to the open offer price.
So, it is generally profitable to enter such a stock when its open offer is announced and exit when that stock nears its open offer price. Such an opportunity may exist in two stocks at a point in time. But, in the case of one, this strategy may work. And in the case of other, it may not. That is why such profit-making concepts are considered unproven and untested.
The moral of the story: do not get hitched on to profit opportunities blindly as each one of them come with hidden landmines, implicit caveats and depend on a host of assumptions. Make sure you do the homework.
The last word
Winning in a bear market needs great skills. Do your due diligence, bank on painstaking research, deliberate and then decide. Each profit opportunity is different from the other. Treat each profit opportunity as an individual case that merits individual attention and caution. If you believe in these canons of due diligence, patience and smart strategy, bears may fail mauling you even when the indices are down.