Bear market is the condition when the stock market falls for a prolonged period of time. It usually loses the value 20% or more over a period of at least two months.
On the other hand, investor pessimism causes an increased sell-off of stocks, which reinforces the downward direction of the market.
What Drives a Bear Market?
A sustained decline in stock prices can happen for any number of reasons, such as investors panicking over economic news including:
- An unexpected or catastrophic event
- Declining corporate profits
- A correction from a previous bubble of stock overvaluation
- A financial crisis in one industry impacting other interdependent industries
- The anxious foreboding of investors with a herd mentality
A bear market experience can scare would-be investors away from investing; you never know when a bear market will materialize. It takes psychological and financial fortitude to ride out the storm. Ironically, this fear alone can sometimes keep a bear market alive.
A Downward Influence on Investments
Some investors prefer to focus on two fundamental principles that allow for taking advantage of the current market situation. First, a bear market is only bad if you plan on selling your stock or need your money immediately.
Second, falling stock prices and depressed markets are friends of the long-term value investor. Value investing was first developed at Columbia Business School by two professors, Benjamin Graham and David Dodd. Then, Warren Buffett, as the successful investor popularized it.
As a value investor, you typically invest long-term with the intent to hold your shares for decades. A bear market creates a great opportunity to accelerate your returns over longer periods. This may seem counter intuitive. But with lowered stock prices, you can make periodic, fixed-amount investments over time in stock and bring down the average cost basis of your holdings and shorten your portfolio’s recovery period once the bear market eases up.
This approach is also known as “dollar-cost averaging.” You’ll end up buying more shares when the price is down and fewer shares when the price moves up.
Making Lemonade out of Lemons
Even if the market doesn’t currently recognize a company’s worth and undervalues its stock, if the company continues to make money as an operating business with solid financial and other characteristics, this says more about the intrinsic value, or essential nature of the company, than that reflected in its current share price.
Learn to separate the stock price from the underlying business, as they often have very little to do with each other over the short-term.
