What would you do in this theoretical example?

[born2invest]

How to buy in a bear market

Say you have company ABC on your watchlist. You think it is a good company and would like to invest into it, however the price for you at the moment is a bit too high. You run some figures and come up with a figure of $10. Meaning, you would buy the stock if the price goes below $10.

It currently trades for $12.

Then along comes a down market, pushing down all stocks across the market. Stock ABC drops down to $9.90.

Since it is below the figure of $10, it is below your value to buy it.

However, in this case, do you risk it and continue to wait and see if the stock gets down to $9, $8 or even $7? Knowing full well that this correction down to $9.90 might be the lowest it may go and could never trade this low again, and within a few months more could be priced back around the $12 or even higher?

My investment approach is to find a value of it that will give me the required return and then buy below it, however I can see the benefits (and the risks) of waiting for it to drop lower.

What would you do in this theoretical example? Or what have you actually done in the past?

[CJ]

Does the Bear value effect your original value or is a Warren Buffet type investment (ie. Coke which is recession proof).

Why buy on a down trend unless a single peice of news could cause it to gap up (ie. PEB could Gap up significantly with another strong announcement).

[macduffy]

I'm always a bit sceptical about "running a few numbers and coming up with a valuation." So much depends on a multitude of assumptions, the old "rubbish in, rubbish out" applies here! Followers of Morningstar would be familiar with their arbitrary estimates of value, causing abrupt changes in recommendations from Buy to Sell - and vice-versa - on the basis of their arbitrary "valuations". Not just them, of course.

I'd take any valuation as only one factor to consider and if the company stacks up otherwise, I'd be buying - BUT not in a downtrend!!!

Not advice, just a personal observation!

[winner69]

What did you do last time RYM went below your buy price ....whatever you did seemed to work

[born2invest]

Does the Bear value effect your original value or is a Warren Buffet type investment (ie. Coke which is recession proof).

Why buy on a down trend unless a single peice of news could cause it to gap up (ie. PEB could Gap up significantly with another strong announcement).

Yes consider this ABC company like a Coca Cola.

Buy on a down trend because I'm not a technical trader and I think of companies and valuations as opposed to lines, candles and moving averages and all that jazz.

[born2invest]

I'm always a bit sceptical about "running a few numbers and coming up with a valuation." So much depends on a multitude of assumptions, the old "rubbish in, rubbish out" applies here! Followers of Morningstar would be familiar with their arbitrary estimates of value, causing abrupt changes in recommendations from Buy to Sell - and vice-versa - on the basis of their arbitrary "valuations". Not just them, of course.

I'd take any valuation as only one factor to consider and if the company stacks up otherwise, I'd be buying - BUT not in a downtrend!!!

Not advice, just a personal observation!

If you don't come up with a valuation how do you know the price you are buying and selling the stock is a bargain or expensive?

Why not buy in a down trend? You cannot predict better than anyone what a stock is going to do each and every day. Trends consistently change.

[born2invest]

What did you do last time RYM went below your buy price ....whatever you did seemed to work

I bought it.

I could have bought it cheaper.

That is what I'm trying to ask.

[born2invest]

I learnt the hard way to never buy anything in a bear market. Doesnt matter what the "valuation" is as it will bear no relation to the share price, which will be dragged down with the entire market as P/Es are reduced. What once might have looked expensive on a P/E of 30 starts to look cheap when on a P/E of 20 but at some point it will probably be on a P/E of 10 and the market will still consider it not worth buying. Until the market turns, stay out of a bear market (unless buying shorts) unless you want to watch your capital going down, down, down .... Its better off in the bank earning interest. Additionally, if you have spent all your money buying shares at the beginning of a bear market you have no funds left to invest at the beginning of the bull, so you miss out on all the wonderful bargains available at that time. Far more lucrative to wait until the market turns.

How do you know when the bear market finishes and when to buy?

No one can really predict the exact bottom

[born2invest]

All the responses have said don't buy in a downtrend, wait until it is all rosy and it's in a bull market.

However, this could be the case in the theoretical example and we wait too long as it is back up to $12.

[macduffy]

If you don't come up with a valuation how do you know the price you are buying and selling the stock is a bargain or expensive?

Why not buy in a down trend? You cannot predict better than anyone what a stock is going to do each and every day. Trends consistently change.

I do take account of valuations but it's only one factor in buy/sell decisions. One only needs to follow brokers' recs to see how these can change, often on quite minor developments affecting a company/sector/economy.

As for buying in a downtrend its a matter of subscribing in the past to expensive lessons in the art of catching falling knives! No doubt there were many "valuations" justifying buying the likes of Equiticorp, Chase Corp, Fortex, Feltex, Dominion Finance et al as they downtrended to oblivion.............

[CJ]

All the responses have said don't buy in a downtrend, wait until it is all rosy and it's in a bull market.

However, this could be the case in the theoretical example and we wait too long as it is back up to $12.Downtrend and bear market are different. If it is "back up to $12", then surely the down trend for this stock (maybe not the market) has ended.

[Lizard]

Never be surprised at how far the market can take a stock from your valuation... nor how far a meltdown can move your valuation once the fall-out bites the real economy. Back in 2008, it was quite possible the market would take your share to $3...

It is fairly straight forward to recover 30% losses - if you buy at $10 and it bottoms at $7 you can probably shrug. However, it becomes much more difficult to recover from 50%+ losses, particularly if you have no new capital to invest at that point.

When we had the last meltdown from Dec 2007, I used ASX data from the Market Analysis database to look at returns to November 2008 for all ASX stocks (ignoring dividends). The average fall in share price over 1822 shares was 53.6%. Only 75 stocks (4%) made gains. Of those that made gains, many were totally illiquid and very low market cap - two thirds of these had a market cap of less than $20m prior to the fall.

Note that this analysis didn't track all the way to the bottom, which occurred in March 2009.

As per some previous analysis I'd done on the 1987 -1991 falls in NZ, the message is to not underestimate how broadly and viciously the market can fall in a bear market! If you lose more than 50%, you will need to make more than 100% to recover... how many years does that normally take?

Having said that, it became clear that not all stocks bottomed at the same time. From my own experience, some stocks bottomed quite quickly and selective buying paid off. In particular, measures like Price/NTA and Price/Sales Revenue were a good indicator at this point and a good screening tool if looking to buy in early. Note that "screening" should be just that and doesn't negate the importance of further due diligence on debt servicing ability, profit forecasts and management quality.

Ideally, it seems a good idea to ruthlessly exit the market on a bear market, wait 3-6 months and then start looking for extreme value stocks. However, this is easier said than done, as a bear is only truly obvious in the rear view mirror, by which time losses have occurred and would simply be crystallised. Hence Phaedrus use of market indicators to "tighten all stops" on his portfolio as the mechanical application of "ruthless".

[cyclist]

B2I,

Good question! Here is what I do:

- What's the reverse of a stop loss? Answer: A Target Buy.
- Set your stop loss (sell) to get you out of a stock when the tide of selling has moved against them
- Set you Target Buy to get you into a stock when the tide of selling has stopped

(etc, see belgarion's post above)



This strikes me as a very clever approach. Thanks belgarion, I'll file that idea away. The difficult part would be to decide how closely you wanted to shadow the falling price. Too close and you might trigger a buy too soon. Too far away and you might buy a little higher than ideal.


p.s. I had to look up how a "target buy" works. From the ASB website, for those like me:

"Target Buy: Indicates that a buy order should be activated if a share trades only at the selected price. Setting a target price enables you to indicate a level at which a buy order should be activated and placed on the market. The target order will only be 'triggered' if the share in question trades at the indicated price. A limit price can also be indicated which means once the 'trigger' has been activated, the shares will be purchased at no more than this limit price. The target order facility is aimed at traders who believe that if the price of a stock reaches a certain level, the share price will continue to rise. The target price is always above the current market price".