When the stock market is relatively calm, it’s easy to stick with an investment plan. Unfortunately, those periods of calm are interrupted by turmoil frequently. It’s far more common to see steep inclines and sharp drops based on nothing more than a less-than-favorable economic indicator.
During these periods, most investors follow the crowd. They buy popular stocks, even if they are overvalued, and they sell quality stocks at a loss because they aren’t confident in an eventual recovery.
All too often, the practical outcome is that these investors buy high and sell low. Of course, that is the exact opposite of the intended result, which is – as everyone knows – to buy low and sell high.
If following the crowd is more likely to generate losses than gains, then what is the best investment strategy? And what do investors do during a bear market?
In short, given current economic conditions, the big question is, should I stay in the stock market or cash in now to avoid the impact of a recession – assuming one eventually materializes.
What Is The Best Investment Strategy?
The key to building wealth doesn’t always come down to one strategy over another. Yes, there are poorly considered strategies that simply don’t work, but those that have been proven effective over time range from short-term trading to buying and holding securities for an extended period.
Successful short-term trading strategies are based on technical analysis and subsequent predictions about the near-term direction of a company, industry, or the larger market. On the other end of the spectrum, there are investors who carefully consider the value of each stock against its price. They only buy into high-quality companies that can be purchased at a bargain, and they hold them for years – even decades.
Warren Buffett, net worth $106.2 billion, sticks with the long-term approach in his personal portfolio as well as the portfolio of his holding company, Berkshire Hathaway. One famous Warren Buffett quote distills this practice into a single sentence: Our favorite holding period is forever.
Meanwhile, Stanley Druckenmiller, net worth $6.4 billion, amassed his fortune with a top-down approach that combines short and long positions in various assets, including bonds, currencies, futures, stocks, etc. He doesn’t hold assets for extended periods, though he does look to the future when making decisions about present trades.
Warren Buffett is known for his thorough examination of company fundamentals. He doesn’t worry about which stocks have become internet sensations. Druckenmiller looks at historical patterns and his own expectations for future conditions when deciding whether to buy, sell, or hold. He doesn’t base his trades on the actions of others.
In other words, Buffett and Druckenmiller are two of the world’s best investors, though they rely on different strategies to generate profits. Both methods work because Buffett and Druckenmiller ignore the crowd. They have the discipline to execute their plans whether or not those plans conform to public opinion.
What Do Investors Do During A Bear Market?
Market downturns turn into bear markets, and bear markets drag on when challenges – sometimes fairly minor – snowball into massive issues.
Bad economic news prompts investors to start selling, which triggers more economic alarm. Investors see relatively small losses in their portfolios, and they escalate their selling activity to prevent those losses from increasing. The sales drive share prices down, which causes more sales, and so on, until prices find a floor.
The best investors ignore all of the sales, decreased share prices, and general alarm over crossing a bear market threshold. Instead, they stick with their strategies. For example, Warren Buffett started buying Coca-Cola stock in 1988 and held onto it through the burst of the dot com bubble, the global financial crisis, and the pandemic-related market crash of 2020.
That’s not because Coca-Cola shares retained their value when the rest of the market struggled. Coca-Cola stock went down when everything else did.
However, with 80 years of investing experience through countless economic cycles, Buffett knew that selling Coca-Cola stock was a foolish move.
He had confidence that it was a high-quality company and would eventually recover its value, so he stuck with his investment strategy and held on to his Coca-Cola shares.
Today, Berkshire Hathaway’s stake in Coca-Cola is approaching 10 percent of the company, and Berkshire Hathaway’s Coca-Cola stock is valued at more than $25 billion.
Druckenmiller isn’t interested in holding stocks forever, but he also doesn’t buy and sell based on current price changes. He times his trades based on his analysis of data and his predictions for future prices.
Should Investors Stay In The Market?
It’s tempting to allow doubt to creep in when it seems the rest of the financial world is selling securities and moving away from higher-risk growth industries in favor of safer alternatives. However, those with the discipline necessary to ignore their emotional reactions and focus on the facts can take advantage of tremendous opportunities that are only available when the market is down.
A bear market is exactly the right time to buy low and sell high, as long as the companies in question have the strong foundation and financial resources necessary to overcome obstacles and recover from difficult economic times. Warren Buffett said it another way: be fearful when others are greedy, and greedy when others are fearful.
Selling high-quality stocks during a bear market makes losses official and removes any chance of seeing those share prices go up. A more effective method of building wealth is to leave those stocks in the portfolio and buy up as many other high-quality, low-priced shares as possible.
Using this method, investors avoid booking losses due to general economic downturns when the underlying company remains strong and ready for a comeback. The new shares amplify profits when the market recovers because, in addition to whatever gains they were on track to make, investors get the extra benefit of owning undervalued stocks when the market eventually returns them to full value.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.