Every investor passionately dreads the bear market. This is a normal human attribute that makes many to leap out of the stock markets immediately they sense the bear trends have set in. Normally, a bear market occurs when the stock market is faced with a prolonged drop in prices of stocks due to decrease in corporate profits or a correction of overvalued shares.

Recently investors around the world have been gripped with this fear. In china, the market dipped to a decade low last Tuesday, sending warnings all over the world that the trends are about to change for the worst.  The effect of this on African stock markets cannot be easily established since most emerging African markets do not have a direct correlation with international markets.   

In Kenya, the Nairobi Stocks Exchange {NSE} fell from its highest peak ever in January 2007 to its low of five months last week. Over Ksh.130 billion {US$ 1.8 million} was lost in market capitalization. This comes amid varied reactions among investors to the operations of the market and suspension of one stock brokerage firm for misappropriation of clients’ funds and other registration misconducts.

Many investors in the East African stock markets are new and started investing during the Bull Run. They have not ever experienced a bear market, therefore an on set of the down trend can be so scary to them since they are used to the value of their shares going up every time. They are mainly short term investors, with a plan to sell their shares over every small gain

What new investors should understand is that over the short term, market fundamentals do not really count much and stock prices are driven upwards by other factors other than the company performance. During the bear market, prices (which are normally over valued) drop causing investors’ earnings to decline. Investors scared of the reduced earnings dispose their portfolios at even lower prices. Other investors who didn’t have an intention to sell do so out of fear of losing their investment. This begins a vicious circle that sees the prices drop even further.

During this period, long term investors, who are usually the big and strong investors, gain over small short term investors. To long term investors, the bear market is a blessing; it’s a period of buying at low prices when small investors are disposing. The on set of a bear market form an hour of reckoning for small short term investors. They are faced with two, unpleasant, choices to make. Either they change their investment strategy or they sell their portfolio at a loss and are crowded out by the big investors. I prefer the change of strategy over being crowded out. 

The Strategy 

A simple strategy that is bound to help anyone is to avoid using the stock market as a source of immediate cash. The stock market is a dynamic system that will not guarantee gains every time. Being prepared for the bear market is the only way that will ensure that one does not lose out.

Consider you had Ksh.30,000 set aside to invest in the NSE. You used the savings to buy 1,000 Total Kenya Ltd stocks when they were selling at Ksh.30 per share. Over the bull period, the price rises to Ksh.56 per share, but you expect the price to drop below the Ksh.30 per share buying price during the bear period.  

To ensure you are still in a good position when the bear period sets in you sell 500 total Kenya Ltd stocks at Ksh.56 and get Ksh.28,000, which is tax free since capital gains in Kenya are not taxable. When the bear market sets in and the price falls to Ksh.28 per share. You buy 1,000 more Total Kenya Ltd stocks, increasing your portfolio to 1500 at no extra cost.

Having good knowledge of the company you are investing in is a great factor for this simple strategy to work.  If you understand the company you will not worry whether it’s a bull or bear market. A strong company in a strategic industry, with good management, and strong underlying analytical fundamentals will usually fluctuate with the market trends but its intrinsic value will remain the same over the long run. 

Buying in blue chip companies that will be there ten to twenty years to come is really a good thing to do if you plan to be in the stock market for long. This can protect you from the danger that the bull market may have overvalued the stock so badly that the prices may fall below its true value in a bear market correction.

Investing in multiple stocks and other forms like bonds and treasury bills can be very rewarding during a bear market. This will reduce the risk of incurring big losses incase of a drop in share prices. Even during a bear market, there are stocks that perform considerably well and diversifying into different companies will help one factor this in their portfolio.

Understanding that the stock market will be faced with different trends over the years and planning well in advance is something that every investor should consider. The bear market is not to be feared, but to be embraced as part of the stock market system.

Bull Markets + Bear Markets = The Stock Market 

The bear market should be taken as a period of buying at low prices, waiting for the Bull Run. Investors should be ready to invest in the Bull market and Bear market using a viable solid investment approach.