INVESTMENT STRATEGY: HOW TO TAKE ADVANTAGE OF THE BULL AND BEAR MARKETS

Bull and bear markets are common terms in the stock market, but not everyone understands these terms. Strategies to successfully invest in the stock market and to take advantage of the bull and bear markets are very important to achieve maximum payoff from your investments.

HOW TO TAKE ADVANTAGE OF THE BULL AND BEAR MARKETS

While not every investment guarantees a payoff, understanding of the bull vs. bear dichotomy will enable you trade as someone very knowledgeable. This will shape your investing strategies and your understanding of stocks. Warren Buffet introduced two rules of investing as: Rule #1: Never lose money Rule #2: Don’t forget rule number one Basically, there is one rule of investing which I state as “always remember not to lose money”. That means we have to invest with certainty that we won’t lose money. This is tricky because stock market by itself is very volatile, and therefore does not guarantee a payoff on investments with certainty. That brings us back to bull and bear markets, and how we can take advantage of each market to make sure we do not lose money.

UNDERSTANDING BULL AND BEAR MARKETS

Think of the use of “bull” and “bear” as a metaphor for how the market moves and take note of how the animals attack their opponents. That is the key! When they attack their opponents, a bull swipes its horns up into the air.  When a bear attacks, it swipes its paws downwards. If the trend is up, it’s a bull market (reflecting a bull swiping up). If the trend is down, it’s a bear market (reflecting a bear swiping down)

Bull Market

Bull market occurs when the market is aggressively going up over a period of time. It is characterized by rising stock prices and the assumption that stock prices will continue to rise. When investment experts assume that stock prices will continue to rise, they are “feeling bullish”. With rising stock prices and bullish feelings come more and more greed in the stock market. For most people, the general thinking is to invest more in the stock market in order to gain from the rising prices.

Bear Market

Bear market is the opposite of bull market. It happens when the market is going down continually by about 20%. Stock prices are assumed to be falling and to continually fall such that any gains in the market are considered temporary. When market participants assume that stock will fall continually, they are “feeling bearish”. In the bear market, people are really scared of investing and the general thinking is to pull their money out of the stock market.

BEST INVESTMENT STRATEGY

This is the interesting and fun part! The strategy is to take advantage of the bull and the bear. That is, take advantage of the greed and the fear in the market. How do we do this? We do the exactly opposite of what most people in the market are doing. Don’t forget our investment rule “always remember not to lose money”. In order to be “certain” that you won’t lose money, you have to at least buy the stock at a price lower that the actual price. That means, we want to ideally buy the stock in the lower range price. We then wait for the price to rise, we sell and make profit. Let’s break it down for each market type:

For the Bear Market

People assume that stock prices will continue to fall, and tend to rush and sell off their stocks at lower prices to avoid further loses. Take advantage of this fear and buy at the lower price. To be sure you are not going to loose money, watch and listen to “events” that are likely to boost confidence in the economy, then buy just at the point prices begin to show signs strength. With this, you are buying at a low price, but when prices are beginning to rise, then hold and wait for the bull.

For the Bull Market

People assume that prices of stocks will continually rise and therefore tend to invest more by buying more stocks. As prices go up, take advantage of this greed and sell before it begins to fall., yes exit before the next cycle begins! If you buy when prices are low, and sell when prices are rising, you are sure going to collect on earnings. “Events” to watch out for in the market are changes, decisions, or policies of the government that affect the direction the economy moves, or that influence the general confidence of the the people on the economy. Example of these include: Changes in interest rates, release of important economic performance numbers such as job level, and other government policy announcements. These “events” and how they affect the market will be discussed in detail in a separate article. That’s the strategy for bull and bear markets! Do opposite of what everyone is doing, take advantage of the bear (fear) and the bull (greed), and you are on your way to “never lose money”.

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