What I learned in the dot-com bust and later during the financial bust is the need of a sturdy portfolio, shares of companies that won’t go broke because those don’t bounce back. Also not betting on buying calls and selling puts, those are closer to gambling than investing.
Bear markets have two phases, the first is when, like Wile E. Coyote running of a cliff, investors discover there is not enough valuation to support prices. That leads to profit taking and prices dropping. Depending on how deeply prices fall, phase two will kick in. Funds have to sell, like it or not, to cover withdrawals. Some hedge funds have “limited withdrawal” clauses to prevent this. Eventually a chain reaction sets in driven by leverage. Investors are forced to sell to meet margin calls and other covenant clauses driving prices further down. Some call this phase “capitulation.”
If you are leveraged or scared you get to sell at the worst possible time. If you have cash you can use the opportunity of “blood on the streets” to bulk up. Buffett is a master, having rescued GE and some BIG Wall St. banks with great profits for Berkshire-Hathaway investors. In any case, when the bear is visible enough, the best thing is to hibernate, go to sleep until the bottom is in place.
Denny Schlesinger