There were wobbles, plenty to be sure, in the global stock markets recently. In India for sure, the chilling winds emanating from the Chinese stockmarket bust together with the frosty draft of the commodity meltdown, has dissipated the warm glow of the post election rally of 2014.
Even if you have not heard it yet, the whispers amongst the dealing rooms across the country is that the bull has turns to bear. We appear to be moving into a bear grip. What do animals have to do with the stock market?
Well as it usually happens in such cases, the origin of the term though murky is interesting nonetheless. One commonly cited version is that the term originated from the trade in bearskins. The middlemen or jobbers in this trade would sell in advance the skins they were yet to receive from the trappers, hoping that prices would fall as the trapping season came to an end and skins arrived at the trading centres from the outback. The name stuck and any one hoping to profit from a fall in prices was termed a bear.
Since in the medieval ages a bloody
sport called bull and bear fights was common, the term bull was considered the
opposite of bear, this was the term used to describe a person who hoped to
profit from rising prices.
There is no getting away from gore and the markets. Another
version, which I prefer because it is more elegant is that the terms come from
the manner in which these animals attack its opponents.
You don’t have to be a matador to realise that a bull attacks by
charging with its head held low and lifts its opponent with its horns. The bull
attack lifts its opponent who presumably gets a high before the crash, much
like the markets some would say.
On the other hand, if you have been unfortunate enough to be on
the business end of a grizzly attack, you would no doubt have seen that a bear
rises and swipes its opponent down. You would not have had much time to react
as the attack would have been sudden and vicious.
Surviving a bear attack requires one to be alert and nimble. As
does managing your portfolio during a bear market. One of the recommended
methods of surviving a grizzly attack is to adopt the fetal position and play
dead. Not a bad technique for dealing with a bear market. In bear markets bulls
don’t stand a chance so the best thing to do is to play dead. Playing dead in
financial terms means putting a larger part of your portfolio into short term
liquid securities. Avoid buying “bargains” and definitely avoid cost averaging.
Cost averaging is a technique recommended by many advisors and
involves buying additional quantities of stocks in your portfolio whose price
has fallen, in order to bring the average cost of your holding down. It is a
technique whose merits I have yet to fathom.
During bear markets, diversifying away from stocks is a sensible
option. On the other hand, bear markets do give great opportunities to buy
value. These are the stocks of great companies that are available at discounted
prices. But one has to be careful. There is a difference between buying great
companies at a discounted prices and buying
stocks that are already in your portfolio at a discounted price from
your cost. The first one can be a great bargain while the second one is more
likely to be a delusion.
Above all it is important not to panic in bear markets. There is a
temptation to sell your holdings but that would usually be a mistake. Diversify
away from the markets, get into liquid short term securities so that you can
return to equities as required.
