Sep 24, 2020
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Can You Make Good Money In Bear Markets?

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Oh the allure of seeking profit in bear markets! Price drops in corrections and bear markets offer tantalizing opportunities to line your pockets whilst other less astute investors mourn their shrinking wallets or worse leap from the figurative ledge into the dark pool of emotional havoc and unrecoverable losses. But not you intrepid bear killer! Forearmed with the knowledge that stocks are happening you sharpen your spear and accumulate shares at the cheap by bold buying or dollar cost averaging

 

Can You Make Good Money in Bear Markets? PIXABAY Bolder bear hunters armed with bazookas as opposed to cutting tools may join the fray by selling short or undertaking any variety of bear options strategies provide they (knowingly or not) bear the increasing risk of having faulty bazooka breech fire inside the face

 

We ll dwell a bit on each of these strategies in a moment but first please be forewarned. I will t let you know how routinely investors have told me well if you know stocks are happening why don t we just……(fill inside the suicidal blank)? As has been famously said the only problem with market timing is the timing which is infamously hard to be got right the siren claims of innumerable hucksters notwithstanding

 

So that said let s plunge into my own twisted and hard-knocks-biased views on a way to make money on bear markets and their panda brethren corrections. By long tradition (but perhaps invested with less deep thought than possibly preferred) bear markets are usually defined as a peak to trough drop of at least 20% using the market closing price (though why the quittin time number has more meaning than others still eludes me) as the definitive metric

 

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1 In 3 Of The World s Children Poisoned By Lead Corrections are triggered by 10% or greater drops similarly defined

 

These terms apply generically to individual securities like specific stocks or to whole markets like the S&P 500 gold oil or hogs. Of course financial terms are frequently quite loose and interpretive generally somewhat less precise than the energy described by say an electron volt or the gap defined by a meter or other less ambiguous descriptors like Avogadro s Number

 

Prices drop when market players – emotional poorly informed and cognitively imperfect human players that we is – lose confidence get scared and become more driven by fear than by greed and become more drawn to selling (before it goes down even more!) than buying (before it goes up even more!). Both tracks represent monkey thinking bereft of clear data and cool thinking

 

What follows are ideas to cash in on the phobia of others in bad markets presented inside the order of what we feel is decreasing conservatism and lengthening risk to the bear hunter. Like Warren Buffett Camarda believes it truly is wise to be greedy when others are fearful and hence suggests that quality stocks or other investments be accumulated when prices are dropping as emotionally jarring as this can be

 

A somewhat less painful more methodical and maybe easier to live with approach is our old friend dollar cost averaging where a given cash slug is frequently invested – monthly or whatever – and that will buy more shares when prices plunge. The next rung up the bear fat-greased ladder takes us to put options which rise in value (or let you sell shares for more than they’re worth) if prices go down

 

Buying put options offers a concentrated bet on price drops with the only risk other than wounded pride (but take heart you’ll soon find it s some other person s fault and feel better!) of losing the cost paid for the option if you bet wrong. Perched next up at about equally risky are selling stocks short or selling calls on stocks you don t own (selling naked calls)

 

For the former you borrow the stock for a fee from a broker but promise to come back it later. For a stock sold short at $100 you profit if the cost drops and you may later buy it for say $50 to come back it to the broker keeping the $50 per share less fees as your booty

 

Of course silly rabbit the broker typically would not loan you its own stock but rather that considered one of its customers often unbeknownst to them. Brokers make good dough in this creepy little corner of the market. For the latter you simply sell the right to purchase a stock for a given price getting paid for the option

 

If the cost goes down the option goes up in value or expires worthless swelling your pocketbook either way. If it goes the wrong way you must buy the stock for sale at whatever price before the option expiration hour when your wallet turns into a pumpkin with a view to deliver it to the option buyer for the cost you optioned if for

 

In both cases of course if the stock goes up you get clobbered possibly each of the way to the poorhouse since there theoretically isn’t any limit to how high a stock can go. So if the stock you sold or optioned to sell for $100 instead goes to $1000 you may see you ll end up in a bit of a good spot

 

For those wishing to add gasoline to the bonfire of the solvencies you may find plenty more leverage using futures and other esoteric delights but I am going to stop here having provided more than enough ammo for a full-scale assault on one s net worth. As is obvious I locate the hunt for bear meat pretty dicey business

 

As with most market timing the fantasy is amazingly compelling it looks so easy and the chance so obscure especially if one finds initial success as at the blackjack or roulette table. But in the end the casino-like odds are against you and this must be borne in mind. For simple ole conservative folk like me consider using market dips as buying opportunities to load up on stocks you like after doing all your homework

 

Stocks are the one thing it seems no one wants to purchase on sale but if you may rewire this part of the chattering monkey brain convince yourself quality at the cheap is nice and smart and just be patient you’ll be quite satisfied come hibernation time. Investment risks are everywhere

 

For an expanded post in this topic click here. For a whitepaper written by this author on market risks which could derail your financial goals click here

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