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7 Ways Investors Can Get Rich in a Bear Market

This S&P 500 June 13 officially entered the bear market. While the average bear market lasts just over nine months, many analysts are predicting a prolonged slump in stocks as the Federal Reserve continues to raise interest rates sharply. That has some investors wondering how to get rich in a bear market.

Earlier this year, Jeff Sommer New York Times Wrote a column on how new investors are coping with market downturns. If you are a subscriber, I recommend you to read it. For those who can’t see behind the paywall, Sommer explains why now is a good time to buy stocks for those with a long-term view:

For buyers, prices are much better than they were at the start of the year because we are in a bear market, which means the stock market in general has fallen at least 20% from its peak. While the past doesn’t guarantee anything in the future, the truth is that the US stock market has always recovered from declines for at least 20 years. If you can plan to buy and hold the stock for 20 years or more, be sure to buy it now.

Below I’ll highlight practical steps investors can take to get rich in a bear market. It’s important to note that neither Summer nor I are talking about getting rich quick. Instead, the focus is on developing sound strategies that will help you grow your wealth over the long term.

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Before you start thinking about how to get rich in a bear market, you have to understand the rules of the game. The Fed has generally adopted a dovish monetary policy over the past few decades. When an economic shock hits, the Fed effectively reduces borrowing costs, incentivizing risk-taking businesses.

Dovishness leads to a drop in the purchasing power of the dollar. Since the dollar will depreciate tomorrow, it’s best to spend your money today. Also, since the dollar guarantees that it will lose money, investors have an incentive to do something with their money — anything.

However, in response to rising inflation, the Fed has turned hawkish, which means deflation. Here, the dollar will appreciate tomorrow, so it’s better to save. Additionally, the dollar has a guarantee that it will effectively return value to cash holders.Therefore, investors are motivated no Invest unless the opportunity is so compelling that it is worth setting aside a guaranteed profit.

Before trying to get rich in a bear market, you must understand this basic framework.

Research

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This seems like an obvious step, but I’m talking about real Research, not simply browse the internet for material that already aligns with your views. You might be surprised how little research is done these days.

Humans have behaved consistently in the realm of stocks over time. Even with the advent of the internet, people still fall into the same traps, like chasing meme stocks or cryptocurrencies higher.

do not trust me? On the eve of the 1929 stock market crash, Yale University professor Robert J. Shiller noted, people were drawn to the newest mass-communication platform: the radio. On it, hits like “I Faw Down an’ Go Boom!” mocked the excesses of retail investors: “I got a tip to buy some stocks, lost my shirt, lost my socks.

The moment I bought some stocks, they started to slump. The lyrics show that people tend to behave predictably when it comes to money, regardless of the time frame. If you want to get rich in a bear market, you have to do your research, not simply follow the latest fad.

reverseism

Digital image of bronze bull and bear overlaid with technical chart and coin image; bear vs bull

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Contrarianism can be a lucrative ally if you want to get rich in a bear market. Since human psychology tends to create similar dynamics on a large scale, identifying a development and betting on it could yield substantial market returns.

In a 1997 paper, Schiller noted that people “tend to exhibit overconfidence in their own judgments in experimental settings.” So, if you peruse social media platforms and spot a fundamentally ludicrous deal that still attracts bullish attention from the masses, you may have an opportunity to buck the trend.

Dr. Jim Taylor mentioned a range of psychological effects on the stock market. For example, Taylor discusses confirmation bias, or “the tendency to seek or interpret information that will validate our beliefs. For example, if a trader really likes tech stocks, he or she is more likely to seek out market information that justifies buying or keeping them. , and ignore conflicting information.”

As cynical as this may sound, you can bet against the empty hopes and aspirations of the masses.

Leverage

Abstract image of a stock chart showing plummeting prices.

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In the investment framework, leverage refers to the use of borrowed funds to increase the potential return on a particular trade. When I talk about how to use leverage in the context of getting rich in a bear market, I’m referring to the forward discount inherent in acquiring deflationary stocks in companies with sound fundamentals.

Let’s say a sharp decline has materialized before you have a chance to buy a put option or use a similar strategy to profit from a decline in asset prices. You can still make money through the traditional buy-and-hold mechanism. To do this, you need to identify the most resilient companies and load them.

A few years ago, McKinsey & Company published an article on the role of emotions in driving market behavior. In their analysis, the authors recognized that human emotions can affect the stock sector “in some transient circumstances.” However, they eventually concluded that fundamentals still dominate.

Bear markets offer investors the opportunity to buy quality stocks at bargain prices.

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Small-cap stocks displayed on Wall Street's stock exchange board. Small cap stocks. Small cap stocks.

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The safest way to get rich in a bear market is to buy quality stocks at low prices, not cheap stocks at cheaper prices. In a game of chance, you want to give yourself the best chance of success. That said, it probably doesn’t hurt to consider some small-cap opportunities for your speculative capital when your base is covered.

The appeal here comes down to math. Typically, a market downturn affects companies with less capital first and more. So you might be able to get a bigger stake than in a bull market.

Note that this strategy is very risky. There’s a reason smaller companies sold first. They may not have the capital to withstand a recession like their larger peers. So, when considering more speculative stocks, focus on those with relatively solid financial metrics, such as a solid balance sheet or a positive trend in retained earnings.

patience

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This goes without saying, but I’ll say it anyway: If you want to get rich in a bear market, you need patience. I’m not talking about months here. Investors could face a multi-year deflationary cycle.

Japan has been fighting deflation for decades, doing everything it can to raise prices. In the end, it got some inflation, but it was wrong. I’m not predicting a similar scenario in the U.S., but I wouldn’t assume any time soon that we’re going from a bear to a bull market in the near future.

Looking at historical data, the purchasing power of the dollar increased by 38% between August 1929 and March 1933. When it hits, deflation can be an annoying and frustrating process. Nobody wants this to happen. However, it is better to be prepared for this.

effort

A group of colleagues discussing something in an office meeting room.

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While not a market-related idea, the concept of effort is probably one of the most effective if you want to get rich in a bear market. Many people use mediocrity as their bottom line and just do enough. While this attitude may reduce it in a bullish market cycle, in a deflationary cycle it can be career-destroying.

As countless sources have pointed out, it’s better to go the extra mile. Those who do have a better chance of keeping their jobs during a recession. What’s more, in this age of back-to-the-office resistance, it’s easy to show your worth just by going back to the office.

As real estate billionaire Stephen Ross recently pointed out, in a recession, employers are unlikely to enact laws due to a tight labor market. “But I think when you go into a recession and people worry that they might not have a job, that’s going to bring people back to the office,” Ross said. “You have to do everything you can to keep your job and earn a living.”

Get ahead of the curve by showing your value Now. After all, you need to make money to get rich in a bear market.

The views expressed in this article are those of the author and are subject to InvestorPlace.com Publication Guidelines.

As a former senior business analyst at Sony Electronics, Josh Enomoto helped sign major contracts with Fortune Global 500 companies. Over the past few years, he has provided unique and significant insights into the investment market and various other industries including legal, construction management and healthcare.

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