Blog : Hibernating Bear

by Peter Leeds on April 9th, 2015

The worst stocks will gain in value in the best markets, and the best stocks will drop in value in the worst.

In other words, when the market is hot you need to make some pretty poor choices to wind up losing out, and the great stocks in the hot markets often soar.

When investment times are good, and the bears are showing no signs of themselves, you can really multiply your gains by following a few simple principles.

Born To Be Wild

Invest in the best company of a group, even if it the most expensive. Buy McDonald's, not Mr. Sub, buy Coke, not Pepsi. The industry leader, with the greatest market share, always has industry advantages over their competition that are hard to quantify. These advantages, such as name recognition, and political sway, help the corporation further dominate their market sectors.

History has shown that it was better to buy Harley Davidson stock than any other motorcycle company. Harley gets the majority of the market share, and the scraps are divided among the other players. In a strong upward market industry leaders tend to fare rather well.

Roll The Dice

As a bull market progresses, and more and more stocks climb, investors tend to start taking greater risks, and looking for bigger returns. Specifically, money begins to migrate to small cap stocks, and subsequently penny stocks, driving up the share prices of these speculative investments.

These investors that are looking to gamble are not concerned with earnings, revenues, assets, etc... They want to get a big score, and they usually don't look into the fundamentals of the company at all.  Often stocks without any real assets or prospects can soar on this irrationality.

Getting involved at the early stages of this irrationality, and keeping your assets in those speculative investments can be very rewarding.

Be warned, however, as it is usually the increase in the prices of penny stocks that can be used as an indicator of a bull market coming to an end. Make sure to start pulling money off the table as your shares begin to produce their big gains.

Alms For The Poor

For short term investors, the importance of strong fundamentals such as revenues, debt load, and assets become less important the stronger the bull market is. Publicly traded stocks can always sell further shares on the open market to raise capital, and when stock prices are going through the roof, coming up with capital through subsequent stock offerings is easy.

Picture a company with huge debt, no assets, no sales revenue... If it's share price is soaring despite all of this, and they raise $10 million in an offering, they are now still the same company with the same poor fundamentals, but they have $10 million in cash. Hypothetically, the market capitalization of that company should be increased by approximately the $10 million in cash, to reflect the increased assets.

I'll Be Back

As a market trends upwards, and continues to heat up, your portfolio may have as little in cash as possible.  Some move most of their money into stocks in order to capitalize on the gains, gradually moving back to a significant cash position as the bull market reaches its peak.

This will increase your exposure to maximum benefit, and is an excellent strategy as long as you take your money off the table in time, before the bull run ends and the bear returns. Because, in actually fact, the bear isn't gone... it's just hibernating.