Source: Rule #1 Finance Blog
By: Phil Town
I sometimes get asked by investors what is a bull market and what is a bear market and how does it relate to Rule #1 Investing?
Well, let me put it in our terms…
We’re really excited about buying when there’s a lot of fear and we’re really excited about selling when there’s a lot of greed in the stock market. I’m going to tell you about how to take advantage of a bull and bear market.
What is a Bull Market?
Bull markets are defined by the market going up aggressively over a period of time. As the market starts to rise, there becomes more and more greed in the stock market. You see more and more people thinking, “Oh yeah let’s put money into the market because it’s going up.”
What Causes a Bull Market?
Though a wide range of different factors contributes to a bull market, the two largest are usually
- A strong economy
- High employment levels across the board
What is a Bear Market?
The bear market definition is exactly the opposite of a bull market. It’s a market where quarter after quarter the market is moving down about 20 percent. That signals a bear market, and when that happens people start to get really scared about putting money into the stock market. That’s because they don’t know how to invest Rule #1 style.
Why is it Called a Bear Market?
Interestingly, a bear market is named for the way that this particular animal attacks its victims. A bear swipes downward during an attack, thus becoming a metaphor for market activity under these conditions.
What Causes a Bear Market?
Generally speaking, a bear market is one that is showing signs of a decline. Share prices are dropping to the point where seasoned investors believe that this trend will continue, at least for the foreseeable future.
What’s Considered a Bear Market?
Most experts agree that a bear market is one in which securities prices have fallen 20% from recent highs, if not more, spawning widespread pessimism from investors.
How Long Do Bear Markets Last?
How long bear markets will last varies wildly depending on the specific situation. Some can last for just several weeks, while some bear markets can last years. A cyclical bear market can even last several years depending on the contributing factors.
Bear Market History
There have been eight true bear markets since 1926. Their lengths varied wildly, with one lasting just six months and another nearly three years. The worst of them saw an 83% drop in the S&P 500, while the other end of the spectrum represented a 21.8% drop.
Bear Market Example
One of the most famous examples of a bear market takes the form of the 1987 market crash, which saw a 29.6% drop that lasted roughly three months.
Bull vs Bear Markets
It’s important to remember that a bull market is characterized by a general sense of optimism and positive growth which tends to catalyze greed. A bear market is associated with a general sense of decline which tends to instill fear in the hearts of stockholders. As Rule #1 investors, we act opposite of the investing public – when it comes to bull vs bear markets – and capitalize on their emotions by finding quality stocks at low prices during bear markets and selling during bull markets when they’ve regained their value.
Should You Buy in a Bear Market?
Rule #1 Investing is about taking advantage of fear and greed. We like to buy when there’s fear. In other words, when the market is going down, we love to be a buyer. When the market is going up, we love to be a seller.
The key thing to understand in Rule #1 Investing is that we move almost exactly the opposite of the way most people are moving in the marketplace. We take advantage of the bulls and bears.
Where most people feel really scared or nervous in a bear market, we’re looking to buy $10 dollar bills for $5 bucks. It’s like going to a flea market and everything is on sale, we get really excited.
Sometimes we get asked, “What if you buy the stock, and it goes down more?”
When we buy, we hope the stock goes down more!
We love to buy more when the stock goes down more. When the stock goes up again, is great because that’s when we start to collect the profit.
In conclusion, in a bear market or bull market, we pretty much do exactly the opposite of what everyone else is out there doing. As Rule #1 Investors we love taking advantage of bull and bear markets.
If you want clarity on other important investing terms that you need to know about, click the button below to get my Rule #1 financial terms glossary.