William - Rookie stock investor
Mike, have you got any tips about investing in a bear market? The second half of last year (2018) and the first part of 2019 have been my first dip since I started investing.
I'm feeling quite fortunate that my portfolio hasn't lost more value than it has - it's 2% down since I started in July 2017 compared with the FTSE 100 which is down 6% and the FTSE 350, down 7%.
But I'm thinking that investing in a bear market is a good opportunity to pick up bargains.
Assuming it's going to be a U-shaped dip (is there any other kind?) are there any strategies you would recommend for strategic buying during this period.
I've also read a bit about "selling puts". What exactly is that? Is it something you'd recommend, if I have my eye on stocks I know I'm happy to buy?
Hello William, I'm a little worried that you are getting too fixated on short term moves in the market. I can guarantee the market will move a lot in an investing career and sometimes very dramatically. If you invest for fifty years then it is perfectly possibly the market could drop by at least 30% 3-4 times in that period. It may even drop more dramatically. Remember, that the Dow slumped 90% in 1929-32 and the UK market (the FT 30 as it was) fell 75% in 1972-74. These huge drops in the market will often come without warning.
What you need to focus on is the underlying businesses. Are they growing their earnings? Are they growing their dividends? Are they earning a high return on your money (equity)? Are their finances in good shape? Remember that even good businesses will go through hard times occasionally but will they restore and surpass their previous earning power? This is what you need to focus on - not stock prices.
If you focus on stock prices then you will drive yourself crazy. You may also do something silly like selling out of a good asset in a panic. Remember, the market is there to serve you not to lead you.
If the underlying earning power is consistently rising but the stock price is falling then this should be of no concern to you. In fact, if you are a buyer (which most readers will be), then this is positively GOOD news as you can buy more earnings for your money, which should result in higher returns.
As Buffett explains here, you should not be buying a stock just because you hope it goes up in price. That is speculating, not investing. Your returns in the long run will come from the underlying asset, NOT the stock price.
You ask about selling puts. That is a complicated topic for advanced investors. I will aim to explain on another page in the future but this would only be advised to people who fully understand it and the risks.
Mike - six-figure dividend earner
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