In this week’s blog post, I will talk about the differences between a bear and a bull market. I will also talk about the different characteristics associated with each. A bear market is a market in which prices are falling, which encourages selling. When the market falls 20% or more from the most recent high, the market is officially said to be in bear market territory. It is called “bear” market because when a bear attacks, it claws “down” the target. A bull market is a market in which prices are rising, which encourages buying. In a bull market, wealth is created easily and even rookie investors can look at their returns and call themselves professionals. It is called “bull” market because when a bull attacks, it pushes its horns “up” into the target.
When in a bear market, stocks drop in price. This is when investors are going to see their profits diminish. To avoid any further losses, investors cash out. As investors start selling their holdings, prices of securities drop even further. This is precisely what helps continue the bear market trend. Before I became a value investor, I would be annoyed every time the market was in red. Now, I am happy when the market drops. Imagine going to the grocery store, and all the items are on sale. Wouldn’t you be glad that you got a bargain on those blueberries, which were priced twice as much just the other day. Value investors think about the bear market and stocks the same way. But again, you don’t want to buy blueberries that have already gone bad, even if they are on sale. When buying stocks in a bear market, a lot of stocks are going to be the box of blueberries going bad. However, there are going to be a few stocks which are your fresh blueberries. Bear market is the opportunity to snatch those great stocks selling for cheap.
When in a bull market, stock prices keep climbing higher and higher. Everyone is happy since people’s investments are appreciating, retirement accounts are growing, wages are growing, unemployment is low, etc. Let me share another grocery store example. You love blueberries, and you expect the prices of blueberries to appreciate. You do not expect to see any blueberry sale in the future. You notice that everytime you go to the grocery store, the prices of blueberries increase. So, you start buying more and more blueberries every time you visit the store. You start freezing your blueberries, and plan on selling those blueberries for a profit in the near future. This is precisely the mentality of investors during a bull market. Individuals speculate that every stock is a BUY. Prices are going to keep going up. Every time the stock goes up, individuals feel great about their decision of buying the security. In fact, the worst time to invest in stocks is during the peak of the market. Unfortunately, no one knows when the peak is; Individuals can only tell it was a peak looking back, and by then, it is too late.
Hope you learned a little and found this blog post helpful. We talked about the difference between bull and bear market. We also talked about investor mentality during bull and bear markets. As always, you can sign up for our mailing list here. Like us on our Facebook page here. Thank you!
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