Buying equities during bear markets

Global stock markets are being battered by the Coronavirus effect as we speak. Many stocks are trading are far below their market value – that is they are a bargain. Now is the time to consider new investments in the equities because, certainly the prices would rebound. The only issue is – no one can accurately predict when they would rebound. But as we have said on many occasions – individuals should invest in the stock market on medium to long term basis and leave stock trading/ gambling to the professionals.

The market has cycles. There is the “bull run” and “bear market”. The bull run is when the entire stock market and most of the stocks on it are increasing in price and value. The bear market is the opposite. Every bull run is followed by a bear market and every bear market is followed by a bull run. It is the length of each one that determines the overall performance of the stock market at the end of the year. We should always expect these cycles; they are the way in which the market corrects itself. Investment experts advise us to enter when the market is down and leave when the market is up. But the current bear market is not market-induced. It is artificially created by the COVID 19 pandemic.

The four most basic considerations in choosing shares are investment objectives, risk appetite, investment tenure and ethical considerations. All these must be carefully considered before investing. Investment objectives, especially at this time, would center on capital appreciation and portfolio growth. Risk appetites define how well we can tolerate the fluctuations that accompany share prices. If we are very risk-averse, it’s best to avoid the stock market altogether and choose investments that assure us of principal and profit e.g. money market investments and government treasury bills.

However, if we invest during a Bear Market, we have a greater chance of capital appreciation in the medium term. Warren Buffet, the most successful and richest stock investor and third richest man in the world, advises a medium to long-term tenure for each investment. When looking at ethical considerations, we look at the businesses of the companies we want to invest in. Some may choose not to invest in alcohol and tobacco manufacturers; others would not invest in companies that manufacture using child labor in developing countries. These four factors help us to ensure we stay true to our financial goals and plans.

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In choosing stock during a Bear Market ,we need to look at the price history of the stock. If the stock usually traded between N20 – N25 but is now priced at N15 without any serious problems occurring in the company, it is obvious it is suffering from coronavirus effect and there is value to be obtained in the medium term if we buy the stock at that low price.  Always do your due diligence and speak to your stockbroker for more insight.

Buying during bear markets may seem contrary to conventional wisdom, especially because no one can tell if the prices would drop further before they begin to climb up again; hence the need for a medium to long-term investment horizon. When the market is down, share prices are generally low, as is currently playing out in many global stock markets- many good stocks are underpriced. That is the time to buy, one would buy at a bargain. To leave when the market is up is to sell when stock prices are generally high. That way one would make a good return on the investment and fulfill the stock market motto – buy low, sell high. Also, we may choose to keep the stock in our portfolio indefinitely and enjoy good returns via hefty dividend payouts.

It is important to point out that there is a big difference between damaged stocks and damaged companies. Damaged stocks are stocks that have low prices, but the underlying companies are doing very well. Damaged companies are stocks whose prices are low because the underlying companies are failing. In a bear market, buy damaged stocks and not damaged companies.

The stock market is a major vehicle for wealth creation and income generation for most investors. Some investors have lost money but many more have been enriched by it. Empower yourself with relevant information, work with the right partners and do your due diligence before, during and after you commit your finances to equities or any investment asset for that matter. Happy investing.

NIGERIAN TRIBUNE