What to do in a Bear Market

After the amazing 75% increase in 2007 a lot of us have forgotten or don’t even know what is a bear market. The last one we experienced was in 1999 when the All Share Index fell by 7.2%. We had 3 consecutive bear years between 1997 and 1999 before the market recovered in 2000.

So what should we do now, in what looks like a bear year? Technically we are not in bear territory since the Index is up 2% for the year. However, the market has been sliding down since mid February with no end in sight. At this rate we will be in negative territory by the end of week of May 9th.

Don’t Panic
Whatever you do don’t panic. If you are in it for the long term, short term trends should not panic you. Now is a good time to do spring cleaning. Stick with only sound companies. See the next point.

Sell Early
While you should not panic and sell everything in sight, you should sell your losers early. Don’t sit around and watch some of your stocks loose 20% or more. Once in a while we all buy losers. These are typically stocks with weak fundamentals, stocks we should never have bought but we did anyway. Now is the time to get rid of them.

Selling early has saved me in the current negative run. I bought Japaul at N13.7 and Standard Trust Insurance at N5 purely on speculation. I sold Japaul at N12 and STI at N5.2 when I noticed we were in what looks like a bear run. The current price of Japaul is N9.4 (down by 31%) and STI N4.23 (down by 15%).

Historically, companies with weak fundamentals do worse in a bear run. So get rid of them now.

In addition, sell those stocks you feel are over valued relative to their peers if you need the cash. I needed cash and I felt GT Bank with a PE of 29+ was selling at a premium compared to UBA. So I sold some of my GT Bank at N37.5. Today GT Bank has dropped to N33 while UBA has moved from N49 to N55.

Shop for Bargains
Shop for bargains using the proceeds of sales of losers or extra new cash. Check out those quality stocks now and buy them at reasonable prices. If you are afraid the market might still be going down, use dollar cost averaging to reduce total cost. That is invest the same amount in the same stocks biweekly or monthly. If the market continues to drop you would buy more shares with the same amount in later months.

It is difficult to time the market. No one knows the bottom has been reached until after the fact. Averaging ensures you are in the game without attempting to time the market. However, don’t use this method to average down the cost of losers. This will be like throwing good money after bad money. Use this method to only buy solid companies.

Invest in Mutual Funds
Most mutual funds in Nigeria tend to reflect the performance of the market. Invest in a mutual fund now and you are almost certain of a good return when the market recovers. Most funds are selling at lower prices compared to two months ago, now is a good time to go in.

Reduce Debts
Consider using your spare cash to reduce debts. In the short term it is better to reduce a 14% debt than to invest in a falling market.

Invest in Money Market Instruments
Put some of your cash in short term money market instruments. While the return is usually between 8%-10%, it surely isn’t bad compared to negative returns in stocks.

Finally
Remember, historically, bear runs have been followed by a bull run whose magnitude and length have been greater. The numbers below tells the story.

Whatever you do, don’t panic!

1997... (7.9%)
1998... (11.9%)
1999... (7.2%)
2000... 54%
2001... 35.2%
2002... 10.7%
2003... 65.8%
2004... 18.5%
2005... 1%
2006... 37.8%
2007... 74.7%