Ideas For Surviving A Bear Market

 

The boiling frog premise is based on the idea that gradual changes are really imperceptible to the human mind. But if we were to put a frog into boiling water immediately, the frog would jump out of the pot of boiling water almost immediately or so they claim. Today, we know that the premise is used as a metaphor instead. Scientists make no claims of the veracity of the boiling frog experiment even though some experiments in the 19th century validate that frogs being boiled alive do not perceive the threat of gradual changes and are indeed boiled alive. Whether this is true or not is debatable. But I would like to mention this idea, at least in passing that, we are frogs especially in the stock market.

Like frogs in water that boil gradually, we, as market participants, being retail investors, institutional investors, bond fund managers, speculators and outside passive minority investors which covers the range of investors above seem to be in a similar situation as frogs placed in water that was being boiled gradually. We are metaphorically being boiled alive by the markets!

Let me make the substantiation. If we wind back the hands of time to the Great Financial Crisis, also known as the subprime financial crisis, we see a situation where the peak of Dow Jones occurred on 9th October 2007.

Source : Google

But it was only the 27th of June 2008 that the market was declared to be in bearish territory. This was a good 8 months after the Dow Jones peaked on October 9th 2007. And of course, all of this occurred with the backdrop of a deteriorating financial sector, resulting in a number of notable bankruptcies and then culminating in a desperate push for the troubled asset relief program to purchase failing banking assets. In my mind, the subprime financial crisis began on or around the 9th of October or even earlier than the declaration date of a bear market. Market participants are normally late in determining when bear markets begin and of course, on the flip side, it can be argued that market participants are also often late in determining when bear markets cease. Does the preceding statement not make sense?

 

Source : Wikipedia

So the snapshot above points to when the bear market was officially declared according to Wikipedia. By that time on or around 27th of June 2008, the Dow Jones had fallen to around 11800 points from around 14066 points.

Don’t Time The Market

So going by what has been written above, market timing is really a folly to some extent.  If market timing is so hard to do and so many get these large turning points wrong, then it would make sense to not go down that path altogether. What you want to do is to be approximately right than precisely wrong. Hence, the idea is to focus strictly on the value one receives in exchange for the price paid. The madness of man cannot be understood in its entirety but it can be predicted with a fair bit of certainty and of course, astute investors can take advantage of that.

2 Categories Of Investors Heading Into A Bear Market

So with the ebb and flow of the stock market indices, heading into a bear market, I am going to broadly categorize investors as 2 types for the sake of simplification. There are the investors who are focused on value. And by value, I  mean buying assets at a price that imply a discount to the intrinsic value or in the case of the brand of deep value investing which I practice, buying at a price that is a discount to the readily ascertainable net asset value.

And there is the other type of investor. The investor that does not take into consideration the idea of buying assets at prices below the intrinsic value. So these investors are those that are currently in FAANG stocks in my opinion, are wild speculators who disregard value considerations.

Investors of the latter category, who have bought stakes into richly valued companies will find themselves on the wrong end of an investment over time – the losing end. Why? When one buys stocks which are richly valued, without that margin of safety Ben Graham so often advocates, the result is a portfolio of stocks which have a negative expected return. It is akin to playing a game of roulette without ever a chance of winning over a large number of attempts.

But if you are willing to buy into stocks which represent risk-rewards ratios of $1 to $3, which are likely to be undervalued, while you will take the hit as markets plunge, you will find many of these companies recovering. And you can go by any well established notions of value and you will do well. Be it a low price to book stock or stocks trading at low price to earnings, such portfolios will systematically beat the markets over the long run.

Value Investing Beats The Markets Systematically

Perhaps it is an oversimplification on my part on the idea of investing intelligently and beating the markets. But the literature is all out there. Value investing will beat the market systematically over the time. While some investors have lamented that value hasn’t been performing all that well over the last decade, that is also a result of  speculative markets driven in part by easy credit. I am confident that value will prevail again as it always has. Forget the last 10 years. Look ahead to the next 10 years and beyond.

As always, may you be blessed with prosperity, health and happiness!

You may want to read this article on equanimity next. It puts one in the right perspective to be when a bear market really does hit us.

Charlie Munger & Equanimity

 

Other Articles

Floyd Odlum : The Deep Value Investor You Have Never Heard Of

Net Current Asset Value Investing In Japan

65% Profit In 1 Year For Beaten Down Cash Bargain : AEI Corporation

Junkyard Net Nets From Japan : Leader Electronics Corporation 6867 > 100% Profit In 6 Months

A 10 Bagger Net-Net – A Look Back At Barratt Developments PLC : A Net-Net In 2008-2009

Paying Up For Growth: You’d Better Know What you Are Doing

Books On Net Current Asset Value Investing : Case Study Driven

These books which I have written are case study driven and discuss strategies, mindsets and situational approaches to employing the net current asset value strategy. So often, we see studies talking about the net current asset value approach. But what about the psychological aspects to net current asset value investing? What happens when the stocks that you buy, while trading at less than two-thirds of liquidation value falls further by 20% to 30%? What are the numbers besides just looking at the price to net current asset value ratio? How about the issues surrounding debt? And what about management? Are they trying to survive? What are the factors which makes a company survive and thrive again and what are the factors that causes multi-baggers in net current asset value stocks? All this and more, I hope to answer with some of my experience and certain real world case studies that teach you how to find the next 200%, 300% or 1000% of returns! Clue to the 1000% returns, they are often highly leverage situations. How does one take advantage of all of that? In this website and in some of our books, we hope to try to demystify multi-bagger stocks from a net current asset value perspective.

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kingsley

I have been an investor for 15 years now and my journey has meandered from Warren Buffett to Ben Graham. My start, like many, really was the naive idea that Buffett's skills could be replicated in some fashion. I was proven wrong when some of the supposed stock picks that I chose had dismal performances. Then, I learnt that it is no point trying to be someone I am not. Gradually, through failure and some success in deep value investing, my approach towards stocks gradually shifted to an approach based around Graham's techniques. So, I give credit where credit is due and to Ben Graham, I and many other investors around the world, owe him a great deal. So, if you want to read up on biographies, read about Ben Graham. His seminal work, Security Analysis is a gem. My books are just rich interpretations of what he has taught.

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