The most famous investor Warren Buffett once said – ‘Be fearful when others are greedy and be greedy when others are fearful’. This quote beautifully advises investors on market moods and how to navigate them. Whether in a bear market or bull run, investors should constantly question the reason behind such market sentiments. Also, one question should always be considered – Will the bull run or crash last forever?
Bull and bear markets are two phases in markets – high and low, which you can also call stages of boom and bust, which naturally affect your portfolio and investment decisions. To gain profit in the stock market, you should have a clear concept of bull and bear markets and understand their implications. Not just that, you must also train yourself to have a grip on your emotions – greed and fear – while investing or selling to avoid making any decision in haste that deteriorates your position.
There could be no better time to talk about bear and bull run than now. As Indian markets currently reel under an unofficial bear run, investors can be seen in a mood of panic as the market does any flactuation. To master investing in such situations, let us start with a basic understanding of what a bull and bear market is.
What are bull and bear markets?
A bull market can be defined as an aggressive increase in stock prices and broad market indices over a period of time. There is a general uptrend that creates a lot of optimism and confidence among investors. A bull market can be caused by a variety of factors – a strong or fast-growing economy, GDP growth, reduced unemployment, better business performance, and rising corporate profits.
A high demand to buy stocks leads to rising average prices of shares. During a bull market, naturally, investors are eager to buy securities because of the thriving economies, resulting in a buyer’s market. The most recent example of a bull run can be the markets peaking around 61,000 points (Sensex), right after its fatal crash of 4% in March 2020 due to the pandemic!
Unlike a bull market, which has no clear definition, A bear market is defined as a period of several months or even years during which stock prices consistently fall. The onset of a bearish trend is officially recognised when the markets are down 20% or more for at least two months. Events such as natural disasters, pandemics, or even wars can push forward a bearish trend in the market.
Bear markets can also be an economic trend in which the economy reels from stagnation or decline due to low confidence in the economy, high unemployment, reduced business operations, and meagre profits.
A bear market can also indicate recession (extended period of negative growth). Investors here prefer to sell rather than buy into the market. As investors lose confidence, a selling spree is triggered in the markets. As the demand for stocks falls, the prices fall further. As a result, a seller’s market develops.
But it is to be remembered that bull and bear markets work in cycles. Bear markets could very well be just a part of a stock market cycle and may not have a clear trigger factor.
Let us summarise the basics by tabulating the difference between bull and bear markets.
Difference between bull and bear market
Below are listed a few ways in which a bull and bear market differ:
|Basis||Bull market||Bear market|
|Stock market performance||There is a rising trend where the stock prices are increasing.||There is a downward trend, causing stock prices to fall.|
|GDP fluctuation||When GDP rises, the chances of a bull market are higher.||A bear market can be an outcome of falling GDP.|
|Unemployment||A reducing level of unemployment is a positive economic indicator, leading to a bull market.||Rising unemployment can lead to a bearish trend.|
|Interest rates||Low-interest rates allow businesses to borrow more and grow. Investors have a positive outlook, resulting in a bull market.||High interest rates stifle company growth and are thus associated with bear markets.|
There are a few secrets for profiting in bull and bear markets. However, for that, the most important thing is to have control over one’s greed and also fear. These two emotions represent the two sides of investment risk. Let us see how they are associated with the two market trends.
Greed in the bull markets
Bull markets are typically fueled by economic strength, optimism and positive growth, which tends to fuel greedWhen stock prices are rising, an increasing number of investors become interested in purchasing the stocks. Increasing profits fuel more greed. Investors are encouraged to make more profits and pursue short-term profits. The most important aspect of a bull market is that most people regard rising stock prices as a sign of good things to come and optimism. However, there is always a chance that the prices will eventually fall, and investors who purchase stocks at extremely high prices as a result of the market’s aggressive growth are at a higher risk of suffering massive losses.
Fear in bear markets
A bear market is associated with a general sense of decline, which causes stockholders to be fearful. In a falling market (bearish trend), investors panic sell because they are afraid that the markets will fall further. Fear of losing all of their investments in a falling market leads to aggressive selling, and because the stock market is governed by the demand and supply principle, the market falls even further.
How can you control greed in bull markets and gain confidence in bear markets?
You can make wise investments in either a bull or bear market, but it all comes down to timing. If you can spot the market’s direction early enough, there are numerous opportunities to profit in either market.
Here are a few tips you can keep in mind during bull and bear markets:
Don’t rely on your emotions
Stock markets are a game of emotions, and sometimes, an investor’s emotions of greed or fear can overpower rational thinking. Bull runs may compel investors to keep buying, while bear markets may compel them to sell, regardless of any rationale or analysis.
Market attitudes can neither be controlled nor predicted. If your emotions and greed guide your investment activities, you are inviting a disaster for yourself. The most critical part of making a profit in the flux of the stock markets is not giving in to the public emotion that follows these changes. Taking a rational and realistic approach to investing is critical whether you want to capitalise on the euphoria or make most of the market fears.
Respond to the market with logic rather than emotions.
Conduct a fundamental analysis
Fundamental analysis can be defined as the process of viewing a stock holistically based on macro factors that include economy, industry, sector, and the company. Despite how the market sways, stocks that have strong fundamentals have the potential to withstand harsh falls and bounce back from them. Sure, they may experience volatility or undergo a downward trend during bear markets, but in the long run, they have known to remain stable and can generate wealth.
Fundamentals stand strong even in the face of the bear markets. So, conduct a proper fundamental analysis before investing, and then formulate your investment strategy. For instance, if you hold a fundamentally strong stock that, due to negative market sentiments, has fallen, then it would not be a wise decision to sell it. To sell in a bear phase and buy in a bull phase may not always earn returns.
Avoid impulsive buy and sell decisions in bull and bear market phases.
To get more insight into this, read our A-Z guide on analysing stock fundamentals on the Teji Mandi blog.
Make goal-oriented investments
Investment goals define your strategy and success in stock markets. Aimlessly navigating the markets, especially in the face of a bear run, can prove very costly.
Define your short-term and long-term goals. This will help you keep your greed and confidence in control, even when you spot favourable market opportunities. For instance, assume you sell a huge chunk of your portfolio to invest in a newly listed start-up stock. What do you think would happen here? In your greed for more profits, you have made a risky move that can very well derail your financial planning!
The best way to avoid such instances is to invest with a goal in mind. It can be as simple as investing to accumulate enough funds for your retirement or buying a house or a new car.
And thus, before you invest, define your goals, and pair them with the appropriate investment products that suit your risk profile. Once this is clear, you will have a better idea of how long you wish to stay invested and whether you have enough time to ride out the fluctuations in the market. It also relieves you of the burden of constantly monitoring the market.
Keep a sight on technicals
Technical analysis can be your best friend in bull and bear runs. By providing you with near-accurate entry/exit points and analysing movement and momentum, technical analysis can help protect your corpus and keep you in tune with the market moods.
Instead of being guided by greed and fear, rationalise your decisions based on technical information. Carry out the required analysis based on performance and not predictions.
Technical analysis can also be a window to understand if markets are in a state of bubble or are experiencing a true, justified bull/bear run. For example, if you see a spectacular rise in stock prices that very much resembles the run before a well-known crash, like the 2008 housing bubble, you may want to be careful with your investments.
Be rational in your approach, and never attempt to predict market movement.
Have a diversified portfolio
The importance of diversification, regardless of the market standing, cannot be stressed enough.
Allocating all your corpus to one asset or stock can be disastrous. Different stocks and industries react differently to market moods. For example, did you know that the FMCG sector stocks, during the pandemic phase (bear run), returned the highest for their investors!
The importance of diversification is that it can prevent heavy emotional reactions to market volatility. For instance, if you have a balance of equity shares as well as fixed income securities or debt funds in your portfolio, in a downward trend, you can rely on these secure funds when the value of your equities falls. On the other hand, in a bullish phase, you can benefit from the rising equity prices, knowing that you have other secure investments to fall back on in case of a bad decision or unwanted outcome.
A diversification strategy can provide protection during market cycles as gains can offset the losses in some investments.
Strategise your trading
Just because markets constantly reel in a negative space, it need not mean you cannot make profits. If strategically planned, every market phase can be used to generate profits.
For example, suppose the price of a stock you already own has fallen; instead of panicking and deciding on a sell-off, you can purchase more of it, lowering the overall average cost of your investment purchase.
Assume you had bought 1000 shares of a blue-chip company at Rs. 150 per share. The cost of investment at this point is Rs. 1,50,000. Now, you see a bearish trend in the market. With this, the share price of the blue-chip company has fallen to Rs. 100 per share. You decide to purchase 500 more shares, which costs you Rs. 50,000. With this, you now hold 1,500 shares of the company. But because of this transaction, your average cost per share now stands at Rs. 133.33 (Rs. 2,00,000/1500), which is much lower than your initial cost per share of Rs. 150!
Bull markets can be a great time to revise your investments and find new avenues. The bear market also provides numerous opportunities to invest in highly valued stocks at reduced prices. Experienced investors and trade pundits, in fact, enjoy bear markets as it allows them to indulge in large-scale stock purchases at nominal rates. And when these stocks experience bull runs, their profits can be exceptionally high.
Invest in fixed-income securities
Using fixed-income securities as a hedge against bull and bear market runs can be a wise strategy.
Fixed-income securities will not just give you more confidence in case your equity investments go south; they will provide you with consistent interest income (over the life of the bond). Fixed-income securities can also reduce the overall risk of your portfolio and protect against market volatility.
To know more about investing in fixed-income securities, read our article on ‘risk and return involved in fixed-income investment strategies‘ on the Teji Mandi blog.
Markets, as any experienced investor would know, are constantly in a flux and consumer confidence has a significant impact on these fluctuations. When it comes to the bull and bear market, you should be cautious of how you react to these trends. You must also not lose confidence when the market goes down or give in to greed when the prices rise in your favour. Understanding the market’s fluctuations, as well as having a carefully constructed long-term plan with a diversified portfolio, can assist you in riding out unexpected market fluctuations.
We at Teji Mandi are with you every step of the way. Get active advice on portfolio management from our team of trusted experts. Reach out to us on our website today!