Ever experienced the intense pressures of a bear market, where every investment decision feels like a tightrope walk?
Since my investing journey began in 2008, I’ve navigated through market storms and sunny days alike. Yet, the most recent drawdown has tested my mettle like no other.
Gautam Baid’s latest book, The Making of a Value Investor, which chronicles his struggles and insights during market downturns, echoed my sentiments when I read it. The book essentially is his journal of the Indian stock market during the drawdowns. As investors, regardless of the market in which we invest, we face the same demons during such times.
Reflecting on my journey, I’ve identified two primary reasons why this drawdown felt particularly challenging:
1. The amount invested is significantly higher than in the past. As a young man starting out in 2008 with only $2,800, I knew it would only take two or three months to catch up even if I lost everything.
2. We haven’t seen a prolonged drawdown since 2008, when the financial crisis induced drawdown lasted 17 months. The COVID drawdown of March 2020 lasted only one month before rising to new all-time highs shortly afterwards. In 2022, the drawdown lasted 10 months and recovered at the end of 2023. It was excruciating during those 10 months seeing our new capital diminish every time we averaged down, because we were all accustomed to the stock market bouncing back after every small drop for over a decade.
The biggest growth in investing comes from drawdowns, and I agree with Gautam Baid on the following:
Note: Words in bold are mine, and words in quotations are Gautam’s
1. Concentration is for the investor who is chasing the highest return; diversification is for the investor who wants to survive. And as the saying goes, ‘to finish first, first you have to finish.’
“By the time the bear market ended, I had evolved from being a highly concentrated portfolio investor focused on statistically cheap securities, to one focused on quality and prudent diversification. The entire experience ingrained in my mind the significance of resilience and longevity—the key to compounding.”
“Investing is a probabilistic activity. Diversification is an acknowledgement of the need to always remain humble in this profession.”
“Extreme concentration is a double-edged sword, and this bear market experience is a good reminder that psychologically, I am not suited to it. An advantage of diversification is that one is less emotional about a position, making it easier to exit on the downside.”
“Things can go wrong in ways you never thought of, and your only defense against unknowns is prudent diversification—a portfolio of 20–25 stocks diversified across industries and risk factors. This practice insures against a catastrophic outcome for the portfolio as a whole, and also opens the door to optionality.”
2. There are times in the bull market when doing nothing is the best course of action. Because even I am guilty of looking at cheap, lower quality companies when I cannot find any great companies to buy because they look expensive during bull markets.
“Need to avoid the mistakes of the last bull market, and resist going down the quality curve.”
“No more going down the quality curve ever again in an attempt to get quick short-term returns.”
3. Don’t go to cash when we are experiencing a broad market decline. Instead, consider rotating out of stocks that are lower-quality into great-quality businesses when great businesses are available cheap. Money doesn’t have to be made back in the same way it was lost.
“In this market where decent-quality businesses are now available at reasonable valuation, I would avoid bad-quality businesses available at low valuation, and also avoid government-facing businesses that are available cheap.”
“I have made good use of the recent rally to exit the few below-average-quality businesses in my portfolio, and have deployed the sale proceeds into the existing higher quality holdings.”
4. Don’t just consider the highest returns, consider the amount of stress and time it will require. Many of the highest returns come from young and small businesses that are most volatile. My goal when investing is to make my life better, not to make it miserable.
“Stress-adjusted returns matter a lot. They really do. By the time most of us realize this as investors, we have already exhausted many years and shortened our remaining life spans due to weakened mental health. Old too soon, wise too late.”
The markets have recovered since then and one thing I noticed is that while everyone says they’ll buy when they dip, not many people are able to do so, especially when it’s a prolonged drawdown and the media is giving you every single reason for not to buy—from the Russia-Ukraine war, to inflation, supply chain woes, and interest rates increase.
Market drawdowns immobilize many investors, much like a deer caught in an oncoming vehicle’s headlights.
If you want to borrow one of my rules that has served me well is that I buy when the mere thought of buying is nauseating.
I invite you to share your bear market experiences and insights, head over to the comment section below!
You can get a copy of The Making of a Value Investor here.
Hello Thomas!
I really enjoyed this post!
The first topic really resonated with me. I totally agree that is much easier to invest small amounts, where even big draw downs could be covered with some months of your work salary. When the amount invested become bigger, the pain, both psychological and physical from the draw downs are much worse.
Many thanks for sharing.
Yeah Rodrigo! When beginner investors with a sizeable capital ask me how they should start, even though time in the market is important, I would still usually advice them to DCA in their capital over time because of the psychological factor. It’s usually a good idea to learn how we are as investors before we invest large sums!