What’s the Difference Between a Bull & Bear Market?

I sometimes get asked by investors what is a bull market and what is a bear market and how does it relate to Rule #1 Investing?

Well, let me put it in our terms…

We’re really excited about buying when there’s a lot of fear and we’re really excited about selling when there’s a lot of greed in the stock market. I’m going to tell you about how to take advantage of a bull and bear market.

What is a Bull Market?

Bull markets are defined by the market going up aggressively over a period of time. As the market starts to rise, there becomes more and more greed in the stock market. You see more and more people thinking, “Oh yeah let’s put money into the market because it’s going up.”

What is a Bear Market?

The bear market definition is exactly the opposite of a bull market. It’s a market where quarter after quarter the market is moving down about 20 percent. That signals a bear market, and when that happens people start to get really scared about putting money into the stock market. That’s because they don’t know how to invest Rule #1 style.

Bull vs Bear Markets

It’s important to remember that a bull market is characterized by a general sense of optimism and positive growth which tends to catalyze greed. A bear market is associated with a general sense of decline which tends to instill fear in the hearts of stockholders. As Rule #1 investors, we act opposite of the investing public – when it comes to bull vs bear markets – and capitalize on their emotions by finding quality stocks at low prices during bear markets and selling during bull markets when they’ve regained their value.

 

bull market vs bear market infographic shows bulls strike upward and bears strike downward

Source: sketchplanations.com

How to Use Rule #1 for a Bull and Bear Market

Rule #1 Investing is about taking advantage of fear and greed. We like to buy when there’s fear. In other words, when the market is going down, we love to be a buyer. When the market is going up, we love to be a seller.

The key thing to understand in Rule #1 Investing is that we move almost exactly the opposite of the way most people are moving in the marketplace. We take advantage of the bulls and bears.

Where most people feel really scared or nervous in a bear market, we’re looking to buy  $10 dollar bills for $5 bucks. It’s like going to a flea market and everything is on sale, we get really excited.

Sometimes we get asked, “What if you buy the stock, and it goes down more?”

When we buy, we hope the stock goes down more!

We love to buy more when the stock goes down more. When the stock goes up again, is great because that’s when we start to collect the profit.

Conclusion

In conclusion, in a bear market or bull market, we pretty much do exactly the opposite of what everyone else is out there doing. As Rule #1 Investors we love taking advantage of bull and bear markets.

Thank you for reading my blog, if you want clarity on other important investing terms that you may have been wondering about, click the button below to get my Rule #1 financial terms glossary. Now go play.

Financial-Terms-Bottom-Blog-CTA-644x200-px-

identicon
Phil Town is an investment advisor, hedge fund manager, two-time NY Times best-selling author, ex-Grand Canyon river guide and a former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence. You can follow him on google+, facebook, and twitter.
Summary
Bull vs Bear Market Definitions & Strategy | Rule #1 Investing
Article Name
Bull vs Bear Market Definitions & Strategy | Rule #1 Investing
Description
Phil Town discusses the difference between bull and bear markets while explaining the unique approach that Rule #1 investors use to capitalize on market emotions.
Author
Publisher Name
Rule One Investing
Publisher Logo
  • Rich

    Garrett,
    I read the book about a month ago. Really liked him talking about his sense of Buffett’s intellect and how he could rell WB was thinking on multiple levels during their conversation. I believe the author states that he thinks Buffett is brilliant and that Munger might be even sharper!

    Aside from being a great investor, Mohnish Pabrai comes across as very helpful and accessible. Pabrai’s book, “The Dhando Investor” (thanks for the link to Pabrai’s talk Mike Mac, it is great!) talks about taking advantage of great investing opportunities by being willing to go in big when you have the right situation. Exactly what you mention regarding WFM, BBBY etc..

    Hope you enjoy it.

  • Garrett

    Rulers,

    I just got this book and was wondering if anyone else had read it:

    http://www.amazon.com/Education-Value-Investor-Transformative-Enlightenment/dp/1137278811

    To Your Wealth!

    Garrett

    • Martin

      I was just looking at that book on Amazon the other day but didn’t buy it. Let us know if it is good!

  • Garrett

    Rulers,

    I just started watching this 2 hour video from Mohnish Pabrai: Boston College Oct 9, 2014

    https://www.youtube.com/watch?v=dnS5xWIxo1I

    Pabrai is one of the few investors I follow and have purchased some of the his investments after doing my own Rule #1 Homework on them to make sure I can understand the biz.

    One of the things that has made me a better investor is to stop doing things that detract me from my financial goals. Like instead of watching T.V., I’ll read a book, catch up on Seeking Alpha articles, read quarterly transcripts, email my Rule #1 Wealth buddies, etc.. That’s the stuff it takes to become a successful investor – reading – a lot of reading – along with staying rational!

    All it takes is one company – just one company, that you truly understand where you are comfortable loading up the truck on those shares and riding the wave!

    I missed riding the wave over the last year on Southwest Airlines. Had I NOT sold out when I did, I would have made over $100,000 today in profits just on that one investment. Not many people earn $100,000 a year, much less on their investment. I feel like an idiot for selling!

    How about investing $100,000 in WholeFoods at $37.00 per share starting in July? WholeFoods was mentioned on this blog several times.

    I count 9 times that $37.00 per share was available since then. If I wanted to invested $100,000 in WholeFoods, that means I would have ended up owning about 2,700 shares. In less than 6 months those shares would now be worth $129,600. That’s a 29.6% return in less than 6 months.

    How about Bed Bath and Beyond? We had great posts on that one and I bought 1/4 of what I would have liked to own. $100,000 today on those shares when I bought them at $57.00 would now be worth
    $73.00 per share and that $100,000 would be worth almost $139,000. That’s another 39% in less than 6 months.

    Think about each of those companies – Southwest Airlines, WholeFoods, Bed Bath and Beyond. What can we learn from them?

    First, there was a ton of FEAR when each of those were “on sale” – But MANAGEMENT was capable of dealing with it. They were all selling at a PE multiple much lower than usual. There was competition from others, but that wasn’t going to mean they were going to go out of business. Classic Rule #1 Investments right there.

    Last week I flew with a fellow pilot and we were sharing some of our investing failures/successes. He had some great investments. But the problem was he was only investing $5,000, $10,000 or $20,000 dollars which just wasn’t enough for him to really see the success in his overall portfolio.

    Pabrai talks about loading up when the opportunity presents itself. So does Buffett. Yes, you can get killed if you’re wrong. So don’t be wrong. Follow the best investors and read EVERYTHING you can about that biz.

    I’ve failed more than I’ve succeeded, but I still have 20 years left before I check out from the world of W-2 Earned income to learn from those failures and reach my goals. I know I’ve screwed up a lot – more so than most people. But I’ve seen from others and my own personal experience that YOU CAN RECOVER from your mistakes IF you learn from them.

    “Dabbling” in the stock market is dangerous – it would be better to just buy the S&P 500 Index and dance in and out based on the MONTHLY view of “The Tools” to save you from a market meltdown. And buying a little bit of a great company on sale doesn’t do much for your portfolio either. Like Pabrai, you either have to go BIG or go HOME!

    …But be careful 🙂

    To Your Wealth!
    Garrett

  • Mike Mac

    If you are bored, here is a Pabrai speech that I had not seen before.

    http://www.dataroma.com/m/holdings.php?m=PI

  • Garrett

    Rulers,
    I thought this was interesting as I was a John Deere investor but sold out in September and I’ve been wondering what buffet was doing about IBM lately.

    Berkshire ups GM stake, exits Deere, buys into Express Scripts • 4:28 PM
    Eric Jhonsa, SA News Editor
    Berkshire Hathaway (BRK.A, BRK.B) increased its GM stake in Q3 by 21% in Q3 to 40M shares. (13F filing)
    Berkshire exited its Deere (NYSE:DE) position in Q3; it had a 4M-share stake in the tractor maker at the end of Q2.
    A 449K-share stake was talen in PBM services giant Express Scripts (NASDAQ:ESRX). Stakes in IBM, Wal-Mart, MasterCard, and Visa were moderately increased.

    To Your Wealth!
    Garrett

  • Garrett

    Rulers,

    See the following news clip below. regarding USD demise, Chinese/Russia relations and who is buying up all the gold. I find this trend very interesting and I can only speculate with the authors who have published doom and gloom books about the fall of the USD and it’s position as the world’s reserve currency.

    Russia moves away from dollar, embraces Chinese currency
    MOSCOW, Nov. 14 (UPI) —

    Russian President Vladimir Putin said Friday his country was deliberately moving away from using the U.S. dollar for international trade.

    He told the Russian news agency Tass, in an interview, Russian oil sold to China will be paid for in renminbi, the Chinese currency, part of a trend by Russian companies to denominate imports and exports in renminbi or rubles, and not U.S. dollars.

    We’re moving away from the diktat of the market that denominates all the commercial oil flows in U.S. dollars, Putin said.

    Direct transactions between the Russian and Chinese currencies amounted to $5.2 billion in October, up from $307 million in September, the Chinese central bank’s China Foreign Exchange Trading System reported.

    Volumes are picking up as both countries aren’t against using their own currencies instead of the dollar for mutual transactions. I expect the turnover to grow, Evgeny Gavrilenkov, a currency strategist at Mosciow’s Sberbank Rossii, told the Wall Street Journal.

    To further keep the value of the ruble up without using U.S. dollars, the Russian Central Bank purchased 55 metric tons of gold in the third quarter of 2014.

    Trading in rubles and Chinese renminbi began in 2010 on the Moscow Exchange; it took economic sanctions against Russia by the United States and European Union countries to generate significant interest in the trading. The Exchange is now a partner with the Bank of China, with new services available to Russian and Chinese investors without the involvement of the U.S. dollar.

    South Korea has also expressed an interest in improving commerce with China, and is intending to build an offshore hub for trade in renminbi. A trade agreement last week between China and Canada will establish a similar trade hub in Toronto, again bypassing U.S. dollars as a means of transfer of payments.

    Source: United Press International (November 14, 2014 – 10:47 AM EST)

    To Your Wealth!

    Garrett