Friday, 11 April 2014

What Is Your Bear Market Strategy?

Fail To Plan Is Plan To Fail.

A plan in place does not mean sure success, but no plan at all is a sure failure.

For most new investors who have not really "taste" a bear market like me, I think it is necessary to have a plan for it.

What should you do when a bear market arrive?

Should you sell all your shares, or sell only part of them, or hold everything tight?

Should you buy at discounted price? What should you buy and when is the right timing to buy cheap?

I think everyone has their own ways of facing a bear market, but it is important to plan ahead, especially for mid to long term investors.

For short term traders who rarely hold the shares long, it does not really matter that much.

Bear market is unpredictable. Most of the time when things already happened then only we regret and say that we should or shouldn't have done this or that. 

For example during the 1997-98 Asian Financial Crisis, KLCI lost 75% from early 1997.

When KLCI fell from 1,200 to 1,000 points, many people may think that it was time to pick up some cheap shares. However, it later turned out to be just an early part of a fierce bear market.

KLCI then fell deeper to 500 points in Jan 1998, which was already 60% lower from its peak. At this time, there was a significant rebound (shown in green circle in chart above). This might be a "confirmation" trend reversal sign for many people as no one could imagine that it could go lower than 500 points.

A lot of investors might have swept the shares while the KLCI was at 700 points around Feb 1998. The truth was, KLCI fell another 60% from there to 300 points just 6 months later.

At 300 points, some "not-so-brave" investors might worried about another round of drop. They waited and only went back in when the downtrend was broken in May 1999.

At this point of time, KLCI already gained 100% from its bottom and chances were missed. However, it is still not wrong as KLCI rose to 1,000 and then 1,400 later.

Those who completely shy away from stock market after being burned should be the real losers.

So, it is obvious that no one can time the market and predict its severity.

When Should I Sell?

Some value investors might think that we should hold the shares and even top up the shares throughout the bear market as long as the companies are fundamentally strong.

However, any fundamentally-sound company may turn unsound after a bear market.

Lets say I bought Public Bank at RM10 in year 2009. Its share price goes up to RM20 now with a 100% gain. If bear strikes now and PBB's share price drop to RM15, RM10 then RM5 in 1-2 years time, should I do nothing? Or should I buy more at RM15, RM10 & RM5 to average down?

When the market recovers, PBB might again reach RM20 in few years time as it is fundamentally strong. It seems like it is OK if I didn't sell any shares earlier. 

However, something unforeseen might occur during the market slump such as change of management or fierce competition etc which make PBB not fundamentally strong anymore, and its share price might not reach RM10 again.

Furthermore, to see my 100% gain built up in 4 years gone down the drain in 1 year is painful. If it takes another 5 years for PBB to reach RM10, then it is zero paper gain after investing in PBB for 10 years (exclude dividend). Why not sell and then buy again later to earn more than 100%?

If I sell PBB at RM20 and buy back at RM5 then this will be ideal but it's as difficult as striking a lottery.

Personally, I still haven't reach the "noble" stage in which I will not worry even when the sky falls down. So I think I should sell during a bear market. As I won't know the bear's behaviour, it is better to sell in stages.

In a real bear market, the indexes will fall much more than 20%. However, please bear in mind that there are a few times in recent history (esp when KLCI was below 1,000 level) that it fell 20-30% but not more than that afterwards. 

What to sell?

For me, the first few stocks to offload when things are turning sour but still not clear, are those with relatively high valuation and high gearing. The last to go, if needed, should be those defensive stocks.

Defensive stocks are those involved in non-cyclical business, in which their businesses are least affected by fluctuating business cycles and market volatility.

Such stocks include utilities and some consumer stocks, as people still need electricity, water, basic travel, food, clothes, and may be gloves etc during a bear market.

In contrary, those involved in technology, finance, manufacturing, property, construction etc should be affected the most, as less people will buy computers / smartphones / property, more people are unable to repay their loan and most construction projects halted.

When KLCI falls 20%, some non-defensive growth stocks might have fallen 50%.

When should I buy?

Of course, as close to the bottom as possible, but we'll never know.

Because of this, investors can use dollar-cost averaging to buy shares if they are not sure. This is an investment strategy that can be used at anytime. It involves investing with the same amount of money at regular interval during a period of time.

For example, we can buy RM2,000 worth of certain shares every 2 months for 6 times in one year. By using dollar-cost averaging, we buy less shares when the price is higher, and more shares when the price is lower. In the end, we can get lower per-share price, besides being less riskier than lump-sum investment. 

If you do not wish to use this method, then can use your own judgement and sixth sense.

What to buy?

Defensive stocks are the last to go and surely should be the first to buy back.

As defensive counters have stable business, usually they can give high and stable dividend. When these kind of stocks are bought at very low price, the future dividend yield can be very high.

So when the market starts to show signs of recovery but the cloud is still not entirely clear, it is safer to go for defensive & high dividend stocks.

At the same time, it is also wise to search for those previously fundamentally-strong companies which are traded at a great discount but their fundamentals are not heavily affected during the bear market.

When the signs of recovery is clearer, then we can look for those small caps growth stocks again, especially those which take the opportunity from the economy downturn to fence off their competitors. 

My Preliminary Strategy

KLCI drops <10% - Business as usual.

KLCI drops 10-20% - More cautious. Buy/add undervalued stocks. Sell/cut overvalued or higher gearing stocks.

Bear entry (KLCI drops >20%) - Sell non-defensive stocks, better to be safe than sorry.

Bear confirmed (KLCI drops > 30%)- Start dollar-cost averaging on defensive & high-dividend or blue chips stocks.

Signs of bear reversal - Start to collect undervalued fundamentally intact non-defensive stocks

End of bear (downtrend broken) - Start to collect good growth stocks, which weather the downturn well and prepare to grow

As there will be many uncertainties, the plan here should be flexible and not to be followed strictly.

The opinion and information above are just from an inexperienced investor which is myself. I have just figured out the strategy while writing this article. It is not proven and may change anytime. To many experienced investors, this strategy might be ridiculous. The purpose is just to share to readers that there is someone who will do this when the bear is coming. 

Anyway, I still think that it is important to have a plan, rather than putting ourselves in a chaos when the time finally comes.


  1. Good Sharing!Personally, i will use commodity price eg silver and gold prices to judge the arrival of stock bear market.Safe heavens (commodities) are sought after by investors to limit their exposure to losses in the event of market downturns.So, silver and gold most probably will spike during financial crisis.May b i m wrong, js sharing.TQ

  2. Can you name some under-valued stocks in Bursa. Tq.

  3. Chow, thanks for your sharing too :)

    Ong, I just study very few stocks, so can't give you a lot of undervalued stocks. I think Latitude Tree is undervalued.

    You can go to i3investor site to check the target price by analysts, or check other bloggers' opinion, then decide which is undervalue.