How to make money in a Bear Market?

People always wonder how to make money in bear market and strengthen their portfolio. First let us understand what a bear market is.

 

A bear market is a condition in which securities prices fall and widespread pessimism causes the stock market’s downward spiral to be self-sustaining. Investors anticipate losses as pessimism and selling increases.

Now that I have told you what a bear market is the second question you may be asking is, “Well how can I make money in such a market? I have always been told that stock market gives the most returns, but now I am just losing!”

Well, you are right that you are losing, but this is a notional loss as I have mentioned in my previous article. You can think of making money if you choose a good stock of a growing business every time it falls and then hold on. A word of caution here would be, not to hold blindly but keep monitoring. Another way of making money is to short the stocks at every bounce and ride the fall. This is what I will tell you next time.

When stock market falls where does the money go?

In order to know this you must understand how the stock market works. In a stock market there are 2 sets of people just like any other market, the buyer and the seller. When there are too many buyers the demand for a stock shoots up and the price follows. Same way when there is more sellers than buyers the supply exceeds demand. This is when the market falls.

The loss of the holder of a stock only happens when he sells it. Until that time it is just a notional loss. Therefore if you patiently wait till the time market moves up, you stand to make money and there is no loss for you.

Now there is a question. How can you make money when the market is falling? It’s simple. You buy the lows and wait. However you should be strong with the basics.

Advance tips:

ROE (Return On Equity): I prefer this to be 20% and above. However in the present market situation anything more than 11.5% is ok with me. Of course, there can be turnaround stories. But that’s outside of scope of today’s discussion.

Debt burden calculation: If a company has debt, it would put pressure on the balance sheet as there will be additional pressure due to interest burden.

The major ratios are:

1. Debt Equity Ratio.
2. Interest Coverage Ratio.
3. Current Ratio.
4. Quick Ratio.
5. Debt to Owners Fund.

Out of the above the one that I first check is the Debt Equity ratio (Total Liabilities/Equity). This should be 1 or less especially in the current scenario.

Economic Moat: Investment decision should not only be based on numbers. There is no reason to believe that a profitable company will continue to remain profitable in future. There has to be some competitive advantage for consistent profit. If your highly profitable restaurant attracts a lot of customers, then sooner or later others will start the same business. Your customers will now have other options. Hence profit will get divided. Therefore, there has to be a differentiating factor in terms of features, technology, quality of service etc. All these creates a brand, which becomes the economic moat. Microsoft in USA and Maruti Suzuki in India are examples of brand with competitive advantage over others.

Points to remember:

1. In a bear market most of the shares fall.

2. If you are into trading you can take both long and short positions.

3. Until a stock is sold it is a notional loss.

4. Debt Equity Ratio of <1 is good for now.

5. ROE of <11.5% is good for now.

6. Economic Moat has to be checked before investing.

If you have any questions or comments post it on the facebook page.