Here's how to make money in a bear market

I feel this is extremely bad advice! Teaching people how to be speculators instead of investors!

The Straits Times
Dec 11, 2011
small change
Here's how to make money in a bear market
Buy blue chips when they are down and take profit as soon as there's a brief rebound

By Goh Eng Yeow

Since August, fresh stock market jitters have sparked worries as to whether we may be facing another long, dark stretch that will require new skills and investment strategies in order to make money.

For those of us with long memories, the nightmarish market conditions that existed for years after the 1998 Asian financial crisis come to mind.

To recap, Singapore enjoyed one of its biggest bull runs in history between 1993 and 1996, as yield-hungry foreign fund managers poured billions of dollars into Singapore stocks in search of higher returns.

But all came to grief in July 1997 when Thailand lost its fight against speculators who bet on the Thai baht plummeting against the greenback because of the cash-flow problems faced by its conglomerates in servicing their huge US-dollar loans.

The resulting contagion spread like wildfire across Asia, engulfing other economies such as Malaysia, Indonesia, South Korea and Hong Kong.

Although the situation stabilised 16 months later, as the United States central bank's soothing brew of interest rates cuts slowly eased the credit crunch that rocked the market, it took years for Asian economies to recover their poise.

Between July 1, 1997 and Sept 4, 1998 - the low point in the crisis - the benchmark Straits Times Index (STI) sank by 1,118 points, or 58 per cent, to a 12-year low of 805.04. It then recovered by 1,778 points, or 221 per cent, to a high of 2,582.94 on Jan 3, 2000, before sinking 1,341 points to a post-crisis low of 1,241 on Sept 21, 2001.

It would take another 5� years after that, before the STI could muster sufficient strength to cross the 3,000-point barrier on Jan 3, 2007.

Now, consider the resemblance - at least superficially - which the euro zone debt crisis bears with the Asian financial crisis.

In the past 18 months, the contagion triggered by Greece's perceived inability to service its public-sector debts had spread like wildfire all over Europe, with the bonds issued by other heavily indebted countries such as Italy and Spain all coming under attack by speculators.

To rub salt into fresh wounds, the euro zone's six remaining triple-A rated countries - Germany, France, Austria, the Netherlands, Finland and Luxembourg - had been warned that their credit ratings might be under threat as well.

For investors, the biggest nightmare is that the crisis seems to run on and on with no end in sight. Each time a flare-up has been doused, another more intense one erupts somewhere else in Europe - to the dismay of those who mistakenly believe that the crisis has been resolved.

Given the intimate manner in which bourses across the globe are connected with one another, this has triggered wild price swings among regional stocks each time a fresh spate of bad news from Europe hits the market.

For those who have lived through the dark days of the Asian financial crisis, the many rebounds and subsequent plunges in share prices over the past few months offer a chilling reminder of what happened more than a decade ago.

But while the overall sentiment may be bearish, there is no need for investors to despair.

One salient observation is that bearish markets rarely move down in a straight line without making a rebound - however brief that may turn out to be.

During the Asian financial crisis, there were nine occasions between July 1997 and August 1998 when the STI rose by 5 per cent or more over periods which stretched between two and five days.

Among these rallies, there were three occasions - early September 1997, mid-January 1998 and the start of February 1998 - when the STI surged by at least 15 per cent, even though the overall market trend was bearish.

There is plenty to suggest that history may repeat itself with the euro zone debt crisis.

One recent example is the powerful stock market rebound which was experienced the previous week, when the world's central banks, led by the US Fed, joined hands to ease the growing credit crunch by slashing the costs of US-dollar loans to cash-strapped European lenders.

Going forward, central banks are likely to offer more pain-relieving measures in order to buy time for Europe to sort out its debt problems.

In order to benefit from the wild price swings as a tug of war breaks out between the bullish traders who believe that the worst is behind them and the bearish ones fearing that more pain lies ahead, investors will need to adopt a more opportunistic approach.

For now, investors will have to suspend the usual 'buy and hold' strategy - and adopt a contrarian approach instead.

This will require them to boldly venture into the market to buy when they believe that blue chips are badly bruised by the sell-off and take profit on their purchases if a rebound materialises.

Given the likelihood that interest rates will stay abysmally low as central banks fight the fresh credit crunch which threatens to freeze up bank lending, investors should also be on the lookout for high dividend-paying stocks.

One word of caution, though. Each time an investor comes across a stock paying a high dividend, he has to make sure that the company's business model is viable enough to make future payouts sustainable, given the uncertain business climate.

Sure, we may be years away from another bullish market which will propel the STI past the all-time high of 3,875.77 reached on Oct 11, 2007.

But as the Asian financial crisis showed, money-making opportunities abound during a bear market. What is needed is a little courage to buy when everyone else has given up in despair. Fortune smiles on the brave-hearted investor.

engyeow@sph.com.sg

(11-12-2011, 09:06 AM)Musicwhiz Wrote: I feel this is extremely bad advice! Teaching people how to be speculators instead of investors!

Musicwhiz,

I think you are very much focussed on Growth stocks and as such, a buy-and-hold (ideally forever or till fundamentals deterioates) is most suitable (through peaks and troughs).

I used to think like you, but blindly (without enough skills or abilities to find good growth stocks), for all stocks ie. whatever I buy, I think that I ought to hold forever, else I won't be investing but speculating or trading.

All that changed after I read 'One Up on Wall Street" by Peter Lynch. I was very much "enlightened" by his categorization of stocks, such as Cyclical, Turnarounds, Slow Growth,... Depending on the category, a different strategy has to be adopted. For eg. you buy cyclicals during their low cycles (he gave US Motor stocks as example, but we could perhaps soon apply it to Property stocks if the latest cooling measures work) and sell when it's peakish.

What I learnt is that a buy-and-hold (forever) strategy is not the only way to make $$ for a Value Investor. Depending on the stock category, we'd have to be planning on when to sell (we may end up holding only for a short term). The decision is still based on valuation but it also includes business cycles (for a cyclical stock) or some other trigger event.

The other thing I read from that book which inspired me greatly was a computation that shows why there's no need to have a Bond-Equity type of allocation (as advocated by Benjamin Graham). Instead, Peter Lynch showed that you can actually make more $$ by switching stocks to another which has better potential for making more $$ (even if you have to sell at a loss). This paragraph is my own interpretation (other people whom I'd recommended to read this book don't seem to have read the same thing!)

My investing method changed greatly after I read this book. I buy and sell regularly (only if I have the free time) as I think I'm emulating Peter Lynch by switching between stocks of the same class (category). So much so that my friends and family members think I'm a trader! (my post on SPH probably reinforced many in this forum that I'm indeed a trader). But deep in my heart, I firmly believe I've not crossed over to the Dark Side.

Back to the ST article you'd posted. I don't think the writer is teaching people to be speculators as he'd also warned that stocks selection has to be based on fundamentals (he used your fav word 'sustainability'). Rather, he's likely advocating a Peter Lynch like approach based on economic cycles (my interpretation). He probably ran out of time or space to explain it properly as the major part of his space was used to talk about the cycles

Hi KOPIKAT.

i have adopted what you said since day one. But i have to improve a lot to learn from your ways/standard.
Ha! Ha! i agreed with "One Up On Wall-Street". Also i agree with some Authors who say, "We should buy and monitor and sell and repeat; and not buy & hold." But of course if i have bought Microsoft, Google then buy & hold is much better. Actually i buy & hold & DRIP "HP" for 29 years but the return is not attractive leh.(I was an ex-HP employee). Alamak! i wish i were Ex-Microsoft instead of Ex-HP. Then i am a millionaire now by virtue of B&H Microsoft shares alone. Too bad! It's not to be. i still DRIP HP shares.

Post more of your tactics, so that we may learn from you leh; if found agreeable.(If same, same wavelength.)
Cheers!

Peter Lynch's books are easy and nice to read. But, basically the concepts were covered by Graham(valuation) and Fisher(scuttlebutt).
One of the nice concepts that I gleaned from the book is to own both Stock A and B if there isn't much valuation difference from each other.
Why bother to analyse to the last detail to decide the winner? Just buy both..haha.

I also want to give advice on how to make money in bear market. The rule is very simple, "Buy the stock when it is about to go up, and sell it when it gone up."

Strictly follow this rule 10 out of 10 you can win, no matter bear or bull market.

(11-12-2011, 10:49 AM)Temperament Wrote: Hi KOPIKAT.

i have adopted what you said since day one. But i have to improve a lot to learn from your ways/standard.
Ha! Ha! i agreed with "One Up On Wall-Street". Also i agree with some Authors who say, "We should buy and monitor and sell and repeat; and not buy & hold." But of course if i have bought Microsoft, Google then buy & hold is much better. Actually i buy & hold & DRIP "HP" for 29 years but the return is not attractive leh.(I was an ex-HP employee). Alamak! i wish i were Ex-Microsoft instead of Ex-HP. Then i am a millionaire now by virtue of B&H Microsoft shares alone. Too bad! It's not to be. i still DRIP HP shares.

Post more of your tactics, so that we may learn from you leh; if found agreeable.(If same, same wavelength.)
Cheers!

Temperament,

It's good to find someone in the forums who thinks in the same wavelength. At CNA Market forum, the traders there think I'm an investor and in ValueBuddies, the investors here think I'm a trader. So, I usually end up talking to myself in forums.

As for MSFT, I do have some. But, if you follow their share price for the past 10yrs+, it'd remained flat at current level. If you factor in exchange rate drop from ~1.8 to current ~1.3, I doubt that you'd be able to make any $$, even though they'd started to pay dividends a few years back. To be a millionaire investing in MSFT, that must have been at least 20yrs back, when they were a growth stock. Today's MSFT and HP is not unlike our SPH / SingPost. Although different in size, similar characteristics are they're in a matured phase of their business cycle ie. we can only milk the cow (for the dividends) till the sun really start to set for their biz.

I only wished I'd put in all my $$ into Apple back then when Steve Jobs returned to serve as CEO as I used to be an Apple IIe fan (the 2 Steves were my idols) so long ago...

(11-12-2011, 10:11 AM)KopiKat Wrote: Musicwhiz,

I think you are very much focussed on Growth stocks and as such, a buy-and-hold (ideally forever or till fundamentals deterioates) is most suitable (through peaks and troughs).

I used to think like you, but blindly (without enough skills or abilities to find good growth stocks), for all stocks ie. whatever I buy, I think that I ought to hold forever, else I won't be investing but speculating or trading.

All that changed after I read 'One Up on Wall Street" by Peter Lynch. I was very much "enlightened" by his categorization of stocks, such as Cyclical, Turnarounds, Slow Growth,... Depending on the category, a different strategy has to be adopted. For eg. you buy cyclicals during their low cycles (he gave US Motor stocks as example, but we could perhaps soon apply it to Property stocks if the latest cooling measures work) and sell when it's peakish.

What I learnt is that a buy-and-hold (forever) strategy is not the only way to make $$ for a Value Investor. Depending on the stock category, we'd have to be planning on when to sell (we may end up holding only for a short term). The decision is still based on valuation but it also includes business cycles (for a cyclical stock) or some other trigger event.

The other thing I read from that book which inspired me greatly was a computation that shows why there's no need to have a Bond-Equity type of allocation (as advocated by Benjamin Graham). Instead, Peter Lynch showed that you can actually make more $$ by switching stocks to another which has better potential for making more $$ (even if you have to sell at a loss). This paragraph is my own interpretation (other people whom I'd recommended to read this book don't seem to have read the same thing!)

My investing method changed greatly after I read this book. I buy and sell regularly (only if I have the free time) as I think I'm emulating Peter Lynch by switching between stocks of the same class (category). So much so that my friends and family members think I'm a trader! (my post on SPH probably reinforced many in this forum that I'm indeed a trader). But deep in my heart, I firmly believe I've not crossed over to the Dark Side.

Back to the ST article you'd posted. I don't think the writer is teaching people to be speculators as he'd also warned that stocks selection has to be based on fundamentals (he used your fav word 'sustainability'). Rather, he's likely advocating a Peter Lynch like approach based on economic cycles (my interpretation). He probably ran out of time or space to explain it properly as the major part of his space was used to talk about the cycles

I think I have to make a clarification here - I do not practice the rigid style of investing known as "Buy and Hold (till death do us part)", but am actually more of a "Buy and Monitor" investor, as in effect, that is what value investing is about. It's also not really accurate to state that I am a "Growth" investor, because after all what is investing without expectation of growth? One must also keep in mind that investing is part growth and part yield, as an investor should be prepared to be amply compensated for his "waiting time" with a decent yield, while observing the business growing steadily over time.

Also, I had read Lynch's "One Up On Wall Street" quite some time back, and I have to stress that he is a Fund Manager who holds 100's of stocks, and therefore is able to classify them according to the categories he came up with (e.g. Stalwart, Asset Play etc). For the purposes of value investing with a focused portfolio, my style leans more towards scuttlebutt (Fisher), intensive research on the business model (Buffett) and running the numbers and valuations (Graham). There is, in fact, not much of Lynch in there.

I do not subscribe to the camp where you have to periodically "switch" out of stocks which you feel are not going to do well, in order to jump on the bandwagon of another which you feel IS. Seeing that Lynch's universe of stocks included several hundreds, he definitely had the ability, latitude and opportunity to practise what he preached. But for a concentrated portfolio approach, the idea is to know your company well enough such that you are confident of its long-term potential and prospects, which eliminates the need to periodically check and "re-balance" your portfolio. Such activity also inherently builds up frictional costs, which you had declined to mention.

Let me also comment on my original statement on Goh Eng Yeow's article. Even though he did mention "fundamentals" and used the word "sustainable", note that it is not the choice of company which determines if one is investing or speculating, it is the underlying intention. To give an example, if one buys SPH (a very stable blue-chip) with the intention of selling tomorrow or a week/month later, this would be classified as speculative activitiy. But if the intention is to hold on and watch the business grow and the cash flows come in over time, then you are an investor. So what I was commenting on was the way he slants his article towards short-termism, rather than focusing on a coherent set of guiding principles for long-term investment returns.

Musicwhiz,

My apologies if I'd offended you in my comments.

For me, the wonderful thing about investing is there're so many different methods and ways of doing it. The only right way is the one that makes you $$ consistently! Mine is probably leaning towards the unorthodox...

As for your comments on Peter Lynch, it does remind me of many in the forum (esp. CNA) who says Warren Buffett approach is not workable for us small timers as he has bargaining power to get good deals (those 10% Pref Shares ones during the US crisis). But, the key, be it Warren Buffett or Peter Lynch, is, the underlying concepts being employed. Peter Lynch managed a huge fund, so, it's understandable that he has to spread out over a huge nos. of companies. If I remembered correctly, he even mentioned in his book why we, small-timers have an edge over him (fund mgrs) as we are not restricted, when it comes to doing a focussed investment strategy (like Warren Buffett). For Fund Mgrs, they have to follow many restrictive internal rules and external regulations eg. not more than 5% (or 10%) of any stock or even not being allowed to buy any small-caps,..etc. So, I'm not surprised if he has to invest in 100s of stocks (but I concede that his is prob a bit too extreme).

I'm also Buffett-Graham-Fischer but overwhelmingly Lynch, as my skills for the former 3 combo is at best only mediocre.

Buffett - I love his wisdom and enjoys his quotes. Many books written about his approach is also easy to read-understand-follow. I'm inspired as he says many of the info he used to make his investment decisions could be gleaned fm the Annual Reports or the competitors' AR.

Graham - I fall asleep when I read his "easier" book (Intelligent Investor) and get a headache when I read Securities Analysis. The only concept I managed to grasp is to be KS (kia-su) by having a good Margin of Safety and figuring out my own way to impute an Intrinsic Value.

Fischer - I fully agree with his approach but don't have the freedom to leave the house to even attend AGM (Don't think they'd allow me to bring along my younger kids). What I do is to use the internet to try to do some of the things.

Lynch - My role model. Am able to adapt many of his ideas, but beyond recognition as he focusses on turnarounds and cyclicals for his multi-baggers whereas I used it for Slow/No Growth, Good Yield stocks for an extra couple of % returns. Once a while, I get lucky and managed to buy some at depressed prices (but not multi-bagger types, at most 10-50% discount).

it is interesting to note that the more active members of this forum tend to have styles of investing that are different from another. the differences don't matter; the best approach is whatever that gives you returns consistently over a long period of time.

i'm strictly graham-ian in my approach and i choose not learn what others such as lynch or fischer or rogers. i strongly believe in having only one intellectual master when it comes to investing; learning the wrong things will lead to painful consequences. but unlike graham, i hold less than 10 stocks in my portfolio and no bonds.

fundamentals are important, but they must always be made in reference to price. some people believe that it is okay to pay the market's asking price so long as the fundamentals of good companies continue to improve, thereby leading to an increase in the share price. indeed, this was how buffet made his fortune. the applicability of buffet's growth investing method is however, difficult to replicate in singapore stocks; singapore's domestic market is far too small for any local company to experience long-term high growth that is characteristic of many of buffet's holdings.

investing in the fundamentally strong companies in singapore (think sph) will give you decent dividends, buying these same companies during a market downturn will give you good capital gains. but expecting the 25+% YoY returns over a 10+ year period (like buffet's performance), with such a strategy, is not so realistic. not unless you trade these counters frequently. people tend to look at only familiar names, but it is important to look everywhere and consider everything to find value.

(11-12-2011, 06:23 PM)KopiKat Wrote: For me, the wonderful thing about investing is there're so many different methods and ways of doing it. The only right way is the one that makes you $$ consistently!

So true!

I also tend to believe that it's not so much about which is the absolute best way but what is the best way for each individual.

I started off being influenced most by the Buffett-Fisher scuttlebutt-know everything about the business method but after a while I realised that it's not going to work for me because a) I end up suffering from info overload, b) I'm a lousy reader so it takes me too long to digest everything and c) sometimes I have no idea what the business is about just by reading the annual report. I'd probably have to make a trip down to the AGM and get someone to explain to me what the industry and business is like.

Eventually, I realised that given my temperament, time and ability constraints, the Grahamiam approach works better for me i.e. I'm better off analysing the financial statements and getting stocks at bargain prices rather than trying to gain superior insights into the business model which is poised for supernormal growth.