Sunday, 26 May 2019

The Beauty of the Bear

When it comes to bear markets, there are two types of reactions. The first is that of outright dislike (I belong to this camp). No one wants to see their wealth erode, so this reaction is quite understandable. The second reaction is that of excitement, which is not natural but induced. Why be excited? Because now you can buy good stocks cheap.

I doubt the people in the second camp. All they are doing is denying the reality so that it doesn’t hit too hard. If Warren Buffett gets excited about buying stocks cheap, that’s still understandable. But when the guy next door assumes an expression of nonchalance at the latest market fall, I sense fakery. We have been indoctrinated to “not” feel the pain of the bear market and express excitement. That forces us to dismiss the pain of losing money. Worse, we think it’s something to be ashamed about. 

Recently, I have started looking at bear markets in a different way. They do cause pain but there is wisdom in that pain. While a bull market makes any rookie believe that he is a star investor, it’s the bear market that unravels your stock-selection strategy. In a bear market, you inevitably have to reevaluate why you did what you did. Most likely, you will find some fault with it. You can’t find these errors in a bull market. Once you fix them, your returns can be even better.

Hence, while bear markets are indeed painful, if you sustain through them, you become a better investor.

If you deny the pain of the bear market, you will have no reason to act on your investment methodology. On the contrary, you will begin buying more of what you own, thus compounding your mistake. 

When Buffett gets excited about bear markets, that’s because he has endured multiple bear markets and understands their nature. For most of us, it will make sense to first start appreciating the beauty of the bear.

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