Bear market investing
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790
12. Stocks: general principles
A disciplined approach to investing is always a good idea, and in bear markets it is particularly important. There are a number of ways you can potentially maximise your profits while minimising your losses:
- Always have a clear view of the potential appreciation in the price of a share you buy. If you've bought the share because you think it was undervalued, you should also know at what price you think it will be fully valued.
- Check share price charts for evidence of resistance levels. If a share you own has repeatedly hit a particular price high and then fallen back, it suggests that the market thinks the share is fully valued at that price. Consider selling if it approaches the high again.
- Check the charts for support levels. If a share has a track record of bouncing back from a particular price low, it suggests that the market thinks the share is undervalued below that price. Consider buying if it heads towards that low again.
- Be flexible: change your plan if circumstances change, particularly if there is a profit warning in a share you hold.
- Establish a mental 'pain barrier' for a share price decline and cut your losses if the share hits it. Better to have a series of small losses than a series of big disasters.
- Run your profits - but be aware of resistance levels, and act accordingly.
- Consider selling part of your holding if the price has risen substantially. This reduces your exposure to the share and cuts its book cost. If the remainder of the holding has a low book cost, you can hold it with equanimity even if the price drops back sharply.
- Diversify. You can reduce your overall risk disproportionately by holding five or ten different shares depending on your experience. Many people think the optimum number for private investors is 15. Remember, however, that these should be in roughly equal sized amounts, and that they should be as different as possible from each other. Consider picking a share from each of six different industries.
Think of it like managing a five a side football team. Field your best players and have some substitutes in mind. Don't hesitate to remove a player who is performing badly. Make sure all of the players are contributing something different to the team.
Recommend Reading
"When a large segment of the market gets overpriced and eventually corrects, everybody gets nailed. The guilty, the less guilty, and those who are just standing around watching all get into trouble. No matter that you've scorned the high-flyer, crazy-multiple stocks; your sensible portfolio, too, will go down. Your only consolation is that you probably won't be as badly mauled and that your stocks are likely to recover more rapidly, because the former favourites are now on everybody's avoid list."
Ralph Wanger
