Intelligent Investing

Ghosts of bear markets past

/ 05:09 AM November 05, 2018

Are you afraid of bear markets? Going through a bear market is one of the most traumatic experiences any investor can go through. At its lowest point, you can lose more than half of your stock portfolio. The magnitude of your losses and the market’s consistent drop can also cause sleepless nights as you worry if you will ever recover your losses. And if you try to go bargain hunting thinking that this is your opportunity to get a good deal, you might still be wrong because the market can continue to go down even if stocks are already cheap. It is not surprising then that everyone, including experienced investors, are afraid of bear markets.

My first encounter with a bear market was in the late 90s, during the Asian Financial Crisis. Back then, I had just started working as an equities analyst in Citisecurities (sister company of COL Financial), recommending stocks for clients to buy.


Armed with a new set of skills, I was excited to apply what I learned to buy stocks and make money for myself. After all, I was only making P8,000 a month and it would be great to supplement my small salary with some profits from stock trading. My dad was very supportive of my plan and lent me some money so I would have more capital to buy and sell stocks.

Unfortunately, when I started to buy stocks, the Philippine stock market was already at the tail end of a bull market and was just about to enter a bear market—the Asian Financial Crisis. So instead of making money, I lost money.


I initially did not want to accept that I was wrong. “How can my stocks be going down? I did my due diligence before I picked the stocks that I bought and I’m not stupid!” Since I didn’t want to accept my mistake, I stayed invested, hoping that the market would rally just enough so that I could at least break even.

However, the stock market has a way of humbling even the proudest investor. It didn’t care who I was, or what I thought it should do. It just kept going down. Since I chose to ignore the trend, my losses kept on increasing. I remained hopeful though as there were days when the market would rally. However, these rallies would only be short-lived and very weak. Declines would resume after a brief pause, lengthening the agony of investors who were “ipit” or trapped like me.

I only admitted defeat when my losses reached an amount that was equivalent to several months of my salary. Only then did I lose hope and sold whatever stocks I still had in my portfolio to cap my losses. It was a very painful experience since I did not only fail to earn money, but I now had to find a way to recover my losses. Given my despair, I seriously thought of staying away from stocks for good. I told myself to just concentrate on my job so that I could create wealth the “normal way,” which was by earning a high salary and setting aside a portion of what I earned in high yielding bank deposits.

After getting over the pain of losing so much money, I realized my mistakes as a newbie investor. Although I was working a stock brokerage firm and had numerous mentors who were knowledgeable about global markets, and who utilized both fundamental and technical analysis, I hardly consulted them because I thought I already knew everything. To successfully invest in the stock market, I realized that I had to be humble and open minded so that I could learn as much as I can from everyone around me. I realized that there were many ways to analyze stocks and it was important to identify the best tool to use during different stages of the market cycle.

I also realized that I needed to learn how most investors think. This is something that you learn by reading reports, talking to others and through experience. Although my analysis might be correct, I was just one of many investors in the stock market who collectively cast their votes by buying and selling stocks, and the market moved depending on what the majority thought.

I also had to remind myself that the Philippines was not the center of the universe. I had to broaden my perspective and learn what was going on in Asia and the rest of the world, and their possible implications on the Philippine stock market.

Most importantly, I learned the importance of risk management. Because of my greed, I invested more than I could afford to lose by using my dad’s money. I was lucky though that my dad never asked me to pay him back because he said he knew I would lose the money anyway. I also entered every trade thinking that I would be right 100 percent of the time. Because of this, I never had any plan on what to do or at what level I would cut my losses in case I was wrong. This was the main reason why I hung on to my losses until they ballooned to dangerous levels.


As in all things, market declines and bear markets also come to an end. In 1998, my dad talked to me and said that he wanted to buy some stocks. I told him he was crazy and that he would only lose money because the Philippine stock market was in a bear market and there were still no signs that things would get better. Although I was already over the pain of losing money, I was still wounded. I knew that stocks were cheap, “fundamentally speaking.” However, I did not have faith in the numbers and was worried that my analysis was wrong and that “cheap can become cheaper.”

My dad explained to me that he wanted to buy stocks because share prices of companies that were run by well-respected businessmen (like the Gokongweis, Gotianum and Andrew Tan) were trading at 80 percent below where they used to be, which was his way of explaining that stocks were cheap. My dad also explained that he was not looking for quick trading gains and that he was willing to hold on to his stocks for a few years if needed.

Reluctantly, I agreed to act as my dad’s agent and slowly accumulated his favorite blue chip stocks. Then, without a warning, the stock market began to rally. However, unlike previous rallies, these rallies were much stronger and lasted longer. Although my dad was not able to accumulate the amount of stocks that he wanted to buy, he had invested enough to make a lot of money.

Shortly before my dad decided to buy stocks, my bosses at Citisecurities also began accumulating stocks. They also made a lot of money when the market turned. In fact, one of my bosses was able to buy a house in an exclusive village using the gains from the sale of the stocks he accumulated during the bear market.

This experience taught me that although bear markets lead to huge losses for some investors, they also create rare opportunities to make a lot of money. This is because stocks only become incredibly cheap during bear markets. Bad times always come to pass and share prices eventually return to normal levels. Unfortunately, only those who are mentally prepared to buy stocks will be able to take advantage of these rare opportunities. Those who are bitter or wounded because of their losses will continue to avoid the stock market.

Although I’ve been an analyst for more than 20 years, and have already experienced several bear markets, I still don’t, for sure, know when and where market corrections or bear markets will bottom. I still make the mistake of buying stocks too early. However, what I do know for sure is that bad times will eventually end. I just remind myself not to get bothered by the losses in my portfolio because I know that as long as the valuations of the stocks I bought are attractive, there is a good chance that I will be profitable over the long term.

I also manage my risk by buying only a little bit at a time, cutting my losses and raising cash when I’m wrong. I also manage my size and invest only an amount that I know I will not need to cover my day-to-day expenses. Risk management is very important so that I can stay objective and be mentally prepared to act when the stock market begins to recover.

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