I wrote a post last month regarding how Bear market will make you rich, if you are willing to accept that price volatility is part of the investment game. Of course, as Musicwhiz has pointed out right at the end of the comment, the business moat should not be adversely affected by the recession that they are unable to bounce back when things pick up. We will see what Howard Marks have to say about that later.
Now, history has shown repeatedly that the market will rebound after a bear market and it appears that many of the financial investors seem to have the warchest and the mental preparation to withstand a dramatic fall in price.
However, it is always easier in theory than to walk the talk.
Take myself for example, I did a quick exercise on my net worth on equity today versus what it would have been back during the recession in 2008. As of Oct 14, my portfolio on equity stands at $250,025. Assuming I used the same portfolio today to compute the lowest price it had seen during the GFC, my portfolio would have looked like this.
No. | Counters | No. of Lots | Market Price (SGD) | Total Value (SGD) based on market price |
1. | FraserCenter Point Trust | 30 | 0.57 | 17,100.00 |
2. | Vicom | 6 | 1.36 | 8,160.00 |
3. | SembCorp Ind | 9 | 1.83 | 16,470.00 |
4. | China Merchant Pacific | 40 | 0.38 | 15,200.00 |
5. | Ascott Reit | 15 | 0.36 | 5,400.00 |
6. | Mapletree Greater China Commercial Trust* | 20 | 0.79* | 15,800.00 |
7. | Neratel | 20 | 0.18 | 3,600.00 |
8. | FraserCommercial Trust | 11 | 0.70 | 7,700.00 |
9. | ST Engineering | 4 | 2.04 | 8,160.00 |
10. | OUE Ltd | 5 | 1.69 | 8,450.00 |
11. | Ascendas Hosp. Trust* | 7 | 0.68* | 4,760.00 |
12. | Stamford Land | 4 | 0.18 | 720.00 |
Total SGD | 111,520.00 |
$111,520!!!
That's a 124% drop in the market value to what I have today.
I don't know about you but that would take a lot of pills to swallow those losses, especially as your portfolio gets bigger. Although I did not go through the previous GFC cycle, but I know they come to you thick and fast. Back then, things were so serious that I remembered companies were closing down and for stronger companies, there was salary and hiring freeze across almost all companies. And I can tell you that there's plenty of considerations to think of when those things happen: Sell now? Buy later? Buy some more? Buy which stocks?
Do you have what it takes?
During periods of uncertainty and volatility, many investors get scared and begin to question their investment strategies, often abandoning them in favor of capital preservation. The most common ones we saw was the selling and pulling out of the stock market altogether, wait on the sidelines, and then attempt to get back in when the economy recovers. As previously highlighted in my post, we know the consequences of waiting on the sidelines and attempt to enter the market at its lowest price. We often fail to sell at the highest price and enter at its lowest price and if you do this consistently, you would be worse off than being invested in the market at all times.
Mentally, it is also not easy to convince and play the devil's advocate with oneself. Despite understanding the general theory that adhering to the public euphoria and following the herd are not always the best option, taking the opposite side is not as easy as it seems. Howard Marks, in one of his excerpt from his book on Contrarianism, mentioned:
"Accepting the broad concept of contrarianism during bear market is one thing. Putting into practice is another. On one hand, we never know how far the pendulum will swing, when it will reverse, and how far it will then go in the opposite direction"
"In order to achieve above average results, you have to think different and better. It doesn't always work to do the opposite of what the herd is doing. You have to know what they're doing, know why they're doing it, know what's wrong with it, then do the opposite"
Finally, the psychological barrier of having to face the losses during recession, even if we know that they are temporary, is undeniably the constant outcast playing in the mind. Alan Greenspan called the human mind for this as Irrational Exuberance.
As much as we know that the losses during recessions are temporary, we hate losing money a lot more. Because of this, we want to hold on to what we have for fear of losing more, which explains why most sells their stocks at a low price, then subsequently buy them again at a higher price. These people are the trendsetter and we see why they have not been successful as the firefighter mental way of investing.
So are you prepared for the bear market? Do you have what it takes to survive and opportune at the bear market?
