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Six Golden Rules for Investing in a Bear Market

Are we in a bear market yet? Whatever the statistics say, it certainly feels pretty dangerous out there. Some sectors, such as big-ticket tech and small caps are finding it pretty beastly. So how do you make money in a bear market? Well for starters try not to lose too much. That brings us to Rule 1.

  1. Do not BTFD (buy the f***ing dip). In the bull market, buying aggressively after each mini sell off has been a great trade. In a bear market, you cannot assume the same rules apply. The FD might in fact turn out to be more than a dip and you might instead be catching a falling knife.
  2. Do not invest in stocks where there are balance sheet worries. In the bull market no-one seemed to worry about this as raising money was easy. But now it is hard and, in some cases, will be impossible. So owning shares in any stock with a clear need for funding means either mega dilution, as an equity raise has to be priced at a huge discount, or total wipe-out.
  3. Listen to the bears, the short sellers. In the bull market, even frauds saw their shares go up, sometimes even after fraud was proved. It is different now and the bears who have survived the greatest bull market in history are, by definition, good. Listen to them and do not try to bet against them.
  4. Companies with solid balance sheets and which are paying well covered dividends will not go bust so when everyone is panicking look to add to your holdings in such companies on days when the screen turns red.
  5. Liquidity will dry up. In many cases it already has. So when you get a “liquidity event” in a small cap you own (for instance a share tip causes great excitement) seize it and use that as a chance to sell. Your next liquidity event could be many moons away.
  6. Keep a good cash balance. It will not go down in value and it will be handy to buy stocks when the opportunity arises and a bear market always throws up some great opportunities for patient long term investors.