There is a lot of money to be made in the stock market and there can be long periods of time when all stocks as a whole go up and up and up. But this eventually has to stop. These stops occur frequently and are called corrections. Sometimes, these corrections can become so large and last for a long time. When this happens, we have a bear market. For a correction to turn into a bear market, the decline of the stocks must be more than 20%. The bear market is thought to get its name from the way in which a bear attacks its prey—swiping its paws downward. This is why markets with falling stock prices are called bear markets.
So, exactly what is a bear market? A bear market is a market trend that occurs when a large sell-off of stocks occurs. This collectively pulls down the price of major stock exchanges and may make many overpriced stocks into a cheap bargain. These bear markets may be caused by an international event or some economic downturn that makes investors think that their stocks are not worth the price. But as many legendary investors like Warren Buffet and Benjamin Graham know, while most investors sell during a bear market, the correct action is to actually go the other way.
There are many scary factors about a bear market. One such factor is that no investor knows when the bear market will end. Bear markets can last from days to many years. But one thing is for sure, all bear markets end. No matter how much time it takes, they will eventually end. Another thing that is scary in a bear market is that many investors do not know what is a bear market and start making the wrong decisions. There is one thing that will make your chances of coming out of a bear market richer very high.
As mentioned earlier, all great investors know that the right decision is not to sell during a bear market. The best step is to BUY, BUY, BUY! Since a bear market will eventually end, these stocks that you have bought will increase in value and bring you profits in the long term. This approach, buying in a bear market and selling in a bear market, is known as value investing and is Warren Buffett’s favorite type of investing.
Value-Investing during a bear market can be done by finding good quality stocks with an established business behind it. A bear market may cause a stock to fall beneath its actual value. Buying thee stocks cheap and selling them in a bull market is the way to go. Some examples of well-established stocks are Coco-Cola or Pepsi. It is best to invest in businesses that are not too cash-intensive(like airlines) as those businesses are usually the first to declare bankruptcy in a bear market. And never invest in penny stocks as they are usually new businesses and quickly run out of business(even in a bear market). Be sure to do your own diligence when finding the right stocks to invest in during a bear market
The opposite of a bear market a bull market. Bull market are when the stock market sees a continuous increase in value over a long period of time. Just like how all bear markets must eventually end, so must every bull market. So, don’t just buy, buy, buy in a bull market as when a correction happens, all your profits will be wiped. Wait for a correction so you get the most value for your buck. You never know when a bull market may turn into a bear market.
Don’t ever invest your emergency funds into a bear market as you may need them before the bear market ends and that may take years. It is your responsibility to do your own diligence when investing.
Now that you know what a bear market truly is, don’t be scared the next time we delve into one. Knowing that all bear markets will eventually end, an investor can make a smart decision and profit instead of losing money when the bear market is over. Just remember, the smart investor will invest in a bear market and reap the profits by using value-investing, the method used by the likes of Buffett and Graham. This will surely grant you success in the long term.