Navigating through bear market? Focus on niche areas where competitive intensity is low

Shagun Jain

Well, the bear market is in full flow now. It is scary that most of the market returns of the last two years have been completely wiped out. Further, those who have had got used to the quick bucks made previously, have seen the exact opposite happening during the last one year.

Many comparisons have been drawn by various analysts, investors and thinkers of this field as to when and how this bear market is expected to end. Also, past patterns are being looked at, if and when the slide in stock prices will end.

Even during the worst financial crises in our recent memories that happened with the fall of Lehman Brothers, the stocks didn’t go down to zero. So, the best case scenario is that somewhere the fall has to halt, and it will halt. Since, when the prices become extremely attractive, smart money will start moving in and give a handle to the prices.

As small investors, how should we behave? Do we continue with the same old pattern? Sell at lows and buy at highs? Or is there a way, we can avoid falling into this trap.

Yes, there are ways and means that can help us navigate the bear markets.

First and foremost, we should have a long term view. Long term meaning extremely long term. That would mean that we should be ready to be invested for years, preferably a decade or more, as long term would help us manage the ups and downs.

Most if not all stocks fall down to very attractive levels during a bear market and may remain so for an elongated period of time. Focus on secular growth businesses, which would continue growing over years. These are precisely the stories that will bounce back faster when the sentiments change. Though there would be a challenge since quality stocks would be of course priced better (higher and therefore richly valued) than the peers. But yes, dig for value, because bear markets literally spare no one.

If you are invested in stocks in which you have conviction, the fall in the prices should provide you with an opportunity to increase your allocation at better (lower) prices. As it not always a one-way ride, we can keep on adding to our high conviction stocks during periods of depressed prices.

Moderating return expectations will help us eliminate our need to invest in ways we don’t understand or don’t have an expertise. Our enduring bias for higher returns often leads us to situations, where the returns might be tad higher, but the risks are pretty unknown.

Considering the above factors as well, our endeavour should be to finding companies with durable competitive advantage, larger market share in its sphere of business, one which acknowledges and works on disruptions that can torpedo their business lines in future, person agnostic companies. Focus on niche areas where competitive intensity is low.

There are multiple examples in the Indian markets that tick the boxes against many if not, all the above requirements. What better time than now, to find out such companies and place our bets for the next few years.