The Bear Market Does Not Make You An Idiot


“Don’t confuse a bull market for brains.” ~Carl Icahn

When the market is trading higher and all of our stock picks are working, it’s easy to think we’re smart.

That’s human nature.

But the truth is, “a rising tide lifts all boats.” It can be relatively easy to make money when everything is trading higher.

The flip side of this coin is that bear markets can make us feel like idiots.

Especially when bear market rallies suck us back into the market – only to send stocks lower once again. As the saying goes…

Bear markets make fools of both bulls AND bears.

If you’re frustrated with losses you’ve accumulated during this challenging year, don’t take it too personally. Many of the smartest investors in the world have been struggling to protect their capital.

But there are things we can learn from this situation.

And the lessons you take from a bear market can be much more valuable than the capital loss tuition.

Here are a few “big picture” lessons to keep in mind.

Fundamentals Matter

During the pandemic, work from home (or WFH) stocks soared.

It didn’t matter whether these companies were profitable or not. People fell all over themselves buying Zoom Video (ZM), Peloton Interactive (PTON), DocuSign (DOCU) and a myriad of other high-growth, low-earnings stocks.

Whatever the price, investors wanted more.

Even professional investors like Cathie Wood of Ark Invest got caught up in the hype.

Buying stocks because the companies are “exciting” and have “cool technology” is not a reason to invest. Not unless that technology eventually leads to profits.

While unprofitable growth and tech stocks can trade higher for a time, you better not overstay your welcome!

If you want to “trade” these stocks, use risk management.

And if you’re a long-term investor please make sure your’e buying companies with long-term profit potential. (And that you’re paying a reasonable price for them today.)

Don’t Fight the Fed

To be successful in both bull and bear markets, you need to pay attention to macro forces behind the market.

And few macro forces carry as much weight as the Federal Reserve.

In 2021, the Fed had interest rates pegged at zero, and was buying bonds to stimulate the economy.

“Don’t fight the Fed” was the rallying cry of bullish investors. They (rightfully) believed that the Fed’s policies would keep stocks trading higher.

But when the Fed pivoted to start fighting inflation, many investors failed to react.

Today, “don’t fight the Fed” means that we need to exercise caution. Because the Fed is deliberately slamming the breaks on our economy in an effort to tame inflation.

A hawkish Fed is bearish for stocks.

Especially high-valuation growth stocks!

There will be a point where the Fed reverses course. But until then, be wary of any bear market rally.

Embrace Humility

When the facts change, I change my mind. What do you do sir?” ~John Maynard Keynes

My family members will tell you that I’m a stubborn person. (How else could I enjoy a 140.6 mile Ironman race, or complete an ultramarathon?)

And while stubbornness has it’s merits (I prefer the term “persistence”), it can also be a huge risk for investors and traders.

We’re always getting new pieces of information on our investments. That’s the beauty of the information age.

And as we process each piece of new information, it’s important to keep an open mind.

Be willing to shift your opinion if the facts change.

Don’t hang on to a position just because you originally thought it would work.

It can feel like “giving up” when you sell one of your favorite stocks. But the freedom and clarity that come from stepping away from a position can actually free you up to make much bigger profits on your next investment.

There are obviously many more lessons we can take from this bear market.

What are yours?

Drop a comment below and tell me what you’ve learned this year.

Here’s to growing and protecting your wealth!

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Flat Broke 2 months ago Member's comment

Good advice. I have to remind myself of that often these days.