There is a famous saying “Optimism is the enemy of the rational buyer”. There is no room for any emotion even Hope in an investment in the stock market. Euphoria is the emotion which runs riot in a bull market. There is no greater disguise than a bull market to mask inequity or inefficiency of a stock.
Prepare for a bull market in the bearish season
“Be fearful when others are greedy and greedy when others are fearful”. This saying means that when the bears strike investors head for the exit. One forgets in a single day all the good times he had and those doubling returns in the bull market.
Cash is King
Bear market is the time one needs to make purchases in good blue chip stocks. Remember August 2013 when due to the rupee depreciation against the dollar nearly (INR 68 = $1) good blue chip stocks were available at very cheap prices.
Unfortunately this is also a season when one doesn’t even want to look at stocks as he has exhausted all his cash, buying shares at inflated prices.(Even a donkeys skin has value in a bull market).
One needs to create a reserve or a cash store for bargain purchases. Think reputed blue chip stocks available at dirt cheap prices. Always keep cash handy for the jackpot. These blue chip Companies soar like eagles in a bull market. The night is darkest just before the dawn and that the depth of a recession is the time to stock up on those winners.
How to profit in a bull market?
- Cyclical stocks also called interest rate sensitives such as banks, automobile and infrastructure stocks collapse in a bear market and rise like a Phoenix in a bull market.
- When inflation is very high, interest rates (repo rates) are generally raised in the economy by the Governor of the RBI. This is a time generally bearish conditions prevail in the economy. Home loans, two wheeler and four wheeler loan interest rates are raised by banks in sync with the rise in interest rates (called repo rates) in the economy.
- One would tend to postpone availing these home and automobile loans until more favorable periods. This affects the loan portfolio of banks which see lesser loans being disbursed. Sales of automobiles and new homes drop in this season as fewer people avail loans to make a purchase. This has a negative influence on infrastructure, automobile and banking stocks. In this negative and dampening sentiment blue chip stocks of these Companies (Interest rate sensitives) need to be picked.
- In a bull market when interest rates fall in the economy (repo rates) or are held steady one would avail of a home loan or an automobile loan from the banks as loan rates are lowered. The stocks of interest rate sensitives such as banks and automobiles would rise leading to vast profits if one had purchased these stocks in a bear market.
Set a target or an exit strategy
- Bulls make money, bears make money, and pigs get slaughtered. Remember never get too greedy when setting a target to book profits.
- If one has set a 15-20% target to book a profit and exit the market then make hay when the sun shines .Never be too greedy and kill the goose that lays the golden egg. Book profits when you are ahead and forget about what happens later. No woulda coulda shoulda
- One always looks to pick up stocks with good fundamentals as well as undervalued stocks available at cheap rates in a bear market after a thorough research.
- Undervalued stocks are those of Companies having good growth prospectives but their value has not yet been factored in by other investors and are available at a favorable or a low price tag. When the stock market’s rise these stocks race ahead and a value investor gains in a bull market.
Rebalance the portfolio
- During the course of one’s investment over a long period of time one might have picked up stocks that do not justify their value in the portfolio.
- A rising tide lifts all boats and sometimes these stocks with no strong fundamentals rise up 50-100% in a short span of time and there is no better time than a bull market to get rid of them. Markets ride on sentiment and even stocks with no strong fundamentals rise in a bull market.
- Store up cash to make a value purchase in the next bear market so that you can profit in the next bull run .A bear market generally follows a bull run and vice versa.
- Quality blue chip stocks are obtained over a number of such cycles and by default one gets a strong portfolio.
- The time to purchase defensive stocks is a sustained bull market. These stocks are available at cheaper rates in this period. When markets crash these stocks hold their own and give one peace of mind when all cyclical stocks crash and safeguard the portfolio.
When to log out of a bull market?
- The period of undying euphoria is the time to be careful and warning bells need to ring in one’s head.
- When returns are too good to be true and even stocks with no strong fundamentals rise up like a rocket and there is a sea of optimism all around then this is the time to head for the exit.
- The key to make money in stocks is a proper exit strategy and timing. Quit when ahead is the motto. Greed and regret are the two emotions which play a major role.
- The key to a good exit strategy is to stick to a set target such as an exit at a 20% profit and never look back.
- The last leg of the rally is fueled by those sitting on the fence. Retail investor who are tired of sitting on the sidelines get greedy and jump into the market. This is the time to logout of the market as many a time a market crash follows this phase.
Get ready for the bear market
- The key to profit in a bear market is to keep cash in hand. Sell all the low quality stocks with no strong fundamentals in the bull market and keep cash handy for good quality blue chip picks which fall in price in a bear market.
- Pick up good quality cyclical stocks in the bear market at dirt cheap rates.
- This helps to rebalance the portfolio and get ready for the next bull run.
There is a famous saying “Know what you own and why you own it”. Remember never be swayed by a bull market. Stick to your set target and quit the game when ahead. No one ever suffered a loss by taking a profit.