Bear market investing

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8. Stocks: blue chips vs small caps

Many investors may prefer to stick with share investing in a bear market even though they are well aware the general trend in prices is downward. This is a perfectly viable option.

Selected shares can appreciate, sometimes substantially, in the course of a bear market either because they started out being modestly valued, because they operate in an industry that survives poor economic conditions intact, or because they have something unique to offer.

We look in a later section at some more tangible examples.

In general, however, past experience has shown that conservatively managed blue chip stocks may perform better during a bear market, at least in relative terms, than smaller companies.

Initially blue chips may bear the brunt of the sharp initial sell-off, because their shares are more easily traded. Later, the relative lack of liquidity in smaller company shares becomes a drawback, not least because institutional investors steer clear of shares with poor liquidity. Other reasons for being wary of smaller companies in a bear market are:

• they are more likely to be dependent on a single industry
• they are more likely to be dependent on the domestic economy
• they are more vulnerable to having bank credit reduced or removed
• they are less able to raise new capital in the markets on reasonable terms.

As bear markets end, the reverse is likely to be true. Big stocks will react first, because they represent an easy way for big investors to channel money into the market. Smaller capitalisation stocks come more into their own as the new bull market progresses. They then do some catching up.

1. A word on bears 2. What is a bear market? 3. Why do bear markets happen? 4. How to spot the appearance of a bear market 5. How bear markets end 6. Bear market investment options: timing the market 7. Bear market investment options: the asset classes 8. Stocks: blue chips vs small caps 9. Bonds 10. Property and gold 11. Cash 12. Stocks: general principles 13. Bear-proofing - low 'beta' stocks 14. Bear-proofing - high yield shares 15. Bear-proofing - sectors that historically do well in bear markets 16. Bear-proofing - sectors that historically do badly in bear markets 17. Bear-proofing - key ratios for selecting stocks 18. Bear-proofing - investing in stocks you know and can support 19. Bear-proofing - pound cost averaging 20. Recognising the revival - a check list 21. Conclusion

• The Bear Book
• Stan Weinstein's Secrets for Profiting in Bull and Bear Markets
• The Great Crash, 1929