The Bear Market Anamoly

Posted on June 9, 2006 , filed under Stocks | Print This Post

It’s funny how most people concentrate on stocks when the market goes up, but shy away from purchasing stocks when some real opportunities exist. When the market is going up, people will invest large sums of money to gain a small return. When the market is down, some of the most savvy business people will choose to sit on the sidelines until prices go back up. If your portfolio is down 20% or more in just the last month and your portfolio is comprised of a diversified group of mid and large cap investments, why would you wait until the market gains back that 20% to continue investing additional funds? It’s really difficult for investors to go against the curve, but the contrarian mentality can help separate your returns from those of the average investor.

When stocks like Taiwan Semiconductor Manufacturing Company Limited (TSM) or United Microelectronics Corporation (UMC) drop more than 20% in the past month, you know these will be the first stocks to recover if the market shows bullish signs again. TSM and UMC are among a few stocks of companies that have shown steady improvement in their businesses and show no signs of business slowing down in the short-term. It’s much easier to sit back and try and earn an over 20% gain in a comeback rebound than to speculate how high stocks like these might go when the market does rebound. I would invest in an improving business in a declining market.

I made the mistake of not leaving enough free capital to take advantage of the recent drop in prices. I’m going to set a new rule for my stock portfolio. If something seems to be too good to be true then it probably is. If my portfolio ever posts a 15% or greater gain in one quarter I will sell at least half my portfolio (most likely spread evenly) to lock in gains and create a hedge against a declining market. Uncertainty is the most correct thing I’ve predicted about the stock market this year.

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