Bull and Bear Markets
Finding value in bull markets can be challenging. When most prices are going up, few discounts can be found. Even bad companies with mediocre earnings potential can trade at overvalued prices.
Still, we can find value in bull markets particularly if a two-tiered market emerges:
- Top tier: “hot stocks” or “winners” that investors chase and can’t get enough of
- Bottom tier: “losers” or the overlooked stocks that investors sell so they can chase hotter stocks
Bear markets are ideal times for us to pick up great companies because their stocks are trading at deep discounts. In declining markets, irrational human behaviour kicks in and investors often look to sell at any price.
They are havens for contrarian investors – we can pick up earnings machines that are available at bargain levels.