How To Invest During a Bear Market?

You might have heard the news that we might be entering a so-called bear market. The financial news sites write about it, and it’s talked about in podcasts and video shows. A bear market is when a stock index like S&P 500 or Dow Jones drops more than 20% from a recent peak. The S&P 500, which is the 500 largest companies in the USA, dipped its toes below 20% recently but went up again and at this time we don’t know whether we will be entering a bear market or not. It would be pure speculation to try to predict the future. But since it’s nice to be ready in case it happens, I thought I would share Warren Buffett’s strategy in a bear market. But first a couple of facts about a bear market.

Photo by Janko Ferlic

Fun Fact About a Bear Market

So why is it called a bear market? Well though many investors are fearful in a bear market the fear of a bear is not the reason for the name. Apparently, the expression is referring to when bears attack they swipe their claws downwards. 

A market that goes up is called a bull market because a bull thrusts its horns upwards when it's attacking. Investors that are betting on a bear market are called “bears” and they are “short” the market (betting stocks will go down). Investors that are investing because they want stocks to go up are called bulls and they are “long” the market. You might have heard someone say, “I’m long Tesla” or “I’m short Tesla” and that simply means that they are either investing for Tesla to go up or down.

A bear market is normal. It happens from time to time, and the most recent bear market was in February-March 2020 where the S&P 500 dropped 34%. At that time the index quickly recovered but, in the past, there’s been longer periods of bear markets – up to 27 months. Sometimes the stock market plunges and other times it’s a slow decline over a long period of time.

Many investors are fearful in a bear market because they see a lot of red numbers in their brokerage account. Many sell to not lose more money because they don't know the business value. But value investors are not fearful – let’s dive into Buffett’s strategy in a bear market.

Warren Buffett’s Strategy in A Bear Market.

Warren Buffett doesn’t invest in the overall stock market or in indexes. He picks out quality companies and buys their stock, and he has often said that he doesn’t focus on the overall market conditions. Conditions don't matter to him. He simply focuses on the business behind the stock and ensures that it’s got talented management with high integrity, that the company has a strong competitive advantage and that it’s a company with a business model that he can understand – a simple business. 

When the stock market drops or slowly declines 20% it’s because people are scared and they’re selling their stocks. But not Buffett. He takes advantage of the low prices and scoops up these quality companies at very low prices to what the company is actually worth (the buildings, inventory etc. etc. – it’s all worth something).

"Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down."

 Warren Buffett 

So, the way to invest in a bear market is to buy a business that’s strong and healthy when the stock is cheap. Most people don’t really know when the stock is cheap, so they’re buying too soon, but as value investors we know the price and it’s quite easy to calculate. 

If the market is down for 27 months, we’re patient – we might get several opportunities to buy even more stocks in our wonderful business and once we’re out of bear territory we watch our stock go up like a bull thrust its horns and if we want to, we sell if the stock is overpriced or we choose to hold the stock forever.