InvestorQ : Are there basic guidelines I can follow to profit from a bear market?
Aditi Sharma made post

Are there basic guidelines I can follow to profit from a bear market?

3 years ago

Guideline number one is not to outguess a bear market. In a bear market, traders must sell on rises; not buy on dips. That is the underlying nature of the market and you are not going to gain by trying to outguess the market. In a bear market, rising prices tire easily and the overhang of supply will invariably create weakness in stocks and indices.

Instead of sticking to equities, try to use options more creatively. You will be surprised how effective these products can be in a difficult bear market. Play the options game in a bear market very carefully. Call options may appear to be cheap, but they may actually be worthless. Put options may appear to be liquid and attractive but they tend to be overpriced in a bear market. A bear market creates many option pricing and value mirages. Be careful of them.

Never bet on the leaders that created the bull market in the first place. That is the first rule of bear markets. If the leaders of the bull rally made money for you, it is still time to dump them. Don’t get emotional about stocks that stood you in good stead during the Bull Run. They are not relevant any longer. In fact, they are the ones that caused this bear market. And similar bull markets rarely repeat. Just run for the exit.

Have you heard about harvesting losses for tax purposes. Lot of HNI investors do that quite smartly and you can use that do. Effectively, it reduces your tax liability. Remember, losses are tax-efficient too! If you are sitting on book losses on stocks, don’t wait in the hope of a bounce-back. Book the loss. You can either adjust against other profits or carry forward these losses. In a worst case scenario, you will be able to at least extract the 33% tax rebate on these losses.

Too much leverage is a strict no in a bear market because these bear markets can be much more violent than you would care to imagine. You cannot control a bear market but you can surely control what you do. Ensure that you don’t leverage too much. Try selling higher calls to reduce your cost of holding stocks. Restructure your portfolio. Shift out of cyclical stocks and high beta stocks and swap them with defensives.

This is a highly debatable issue. Should you at be buying and trying to dig value in the midst of bear markets. Don’t have to take a very rigid stance on that. IF there is value, you can as well look at it. That should be your approach. You will be surprised but a bear market is also the time to extract some excellent bargains. Rewind yourself to 2002 and try to examine the price of capital goods stocks. Had you accumulated in 2002, you would have had a multi-bagger portfolio by 2007. Same was the case at the nadir of 2009. But you need patience!