What I Learned From The Recent Bear Run

What I Learned From The Recent Bear Run. Research is very important. But even more important is maintaining a healthy cash reserve. And just as important as that is having discipline not to use that reserve. There will always be a next storm. What you do and how you invest  will determine whether the next bear run or bear market will cost you money or earn you a fortune.
Last May 22 2013, the Philippine stock market retested it's all-time high - 7,392.20, set just a few days earlier on May 15. It ended up short - reaching just 7,385.07.

And since then the stock market tumbled, spiraled and crashed - with great fanfare along the way.

There were a lot of reasons:
  • Stocks were getting very expensive and were overdue for profit-taking. 
  • There had been an earlier correction last march, but it was relatively small and short-lived considering the rapid rise that preceded and succeeded it.
  • And of course, the dreaded and much publicized announcement by the U.S. Federal Reserve that they would be tapering off their quantitative easing policy.
Needless to say, a lot of private, small-time investors were affected. It was a very challenging time (though one that seems to have turned the corner).

But what I find interesting is that I learned much more during this bear run than I did the previous year and a half I've been investing in the stock market. I'm no expert, of course, but I think the lessons are important enough to share.

I learned that researching your stock is very important.

There's almost nothing worse than getting stuck in a bear run (and especially a bear market) than having to hold a questionable stock. You know the one.

It's not a blue chip, you don't even where the head office is, you may not have even seen it's stores, offices or vehicles. Heck, you may not have even known it existed until you started scouring the companies listed in PSE to find which one looked about to break out based on your newly acquired technical analysis skills.

How can you hold on to a company that lost 15% or more of your capital in a couple of days if you don't have faith it's financially stable, earning well, and recession-proof?

Of course, just selling out is equally worse, if not more so.

When everything is going up on a bull market, any stock will do - they all tend to go up anyway. When everything's going down, you'll suddenly and deeply understand the value of due diligence.
What I Learned From The Recent Bear Run. Research is very important. But even more important is maintaining a healthy cash reserve. And just as important as that is having discipline not to use that reserve. There will always be a next storm. What you do and how you invest  will determine whether the next bear run or bear market will cost you money or earn you a fortune.
What the bear run looked like if you were holding speculative stocks or had no cash reserves

But even more important is maintaining a healthy cash reserve.

Even when cost averaging, it's not a bad idea to set aside a little money for the stormy days- yes, stormy, not just rainy.

The reasons for the bear run were not unprecedented. There will always be a time when stocks are too expensive, and when it's been awhile since the last correction. Even the U.S. Fed's announcement wasn't that surprising. Everyone knew they couldn't keep it up indefinitely, they just didn't like hearing it.

During times like those, nothing will keep you saner and happier than a nice, big war-chest to keep you warm at night while dreaming of the insanely great sale awaiting you at the bottom of the correction.

And just as important as that is having discipline not to use that reserve. 

Especially not for minor corrections and especially for small and ordinary volatility.

This is probably my biggest failing - and I know I'm not alone. A lot of us probably invest what we have when we can. It's not a bad strategy. After all, that's how cost-averaging works.

But it's not enough. If I had set aside even just a paltry 10% of the cash I had for stocks, I could've had a decent stash to use for bargain-hunting. But instead, I used all of it on the day the PSEi dipped 3.81%. A paltry 3.81%, compared to how much it lost before it reached bottom.
What I Learned From The Recent Bear Run. Research is very important. But even more important is maintaining a healthy cash reserve. And just as important as that is having discipline not to use that reserve. There will always be a next storm. What you do and how you invest  will determine whether the next bear run or bear market will cost you money or earn you a fortune.
What bear runs and bear markets look like if you have blue chips and lots of cash.

And it's something that would benefit every investor - regardless of expertise or experience. Because there's one other thing I learned: The stock market is like the climate here in the Philippines; there will always be a next storm. It's just a matter of when and how strong.

Don't get me wrong, it's not going to happen any time soon. And I intend to keep investing in the stock market. But it will happen. And the time between now and then is just enough time to prepare for the next great sale!



If you liked this article, please subscribe to my feed, like me on Facebook, circle me on Google+, or follow me Twitter @thePFApprentice. It's free and you'll be updated when a new article comes out.





Enter your email address for your free subscription






photo credit: AZRainman via photopin cc
photo credit: ilovegreenland via photopin cc
photo credit: marie-ll via photopin cc

No comments:

Post a Comment