So what happens when a bear market hits? You got it: lower prices and lower valuations.
What’s Not To like?
While everyone seemingly understands “buy low, sell high”, a bear market seems to be a time when fear overwhelms perception and thereby clouds rational thought, and many cannot avail themselves of the opportunities that have occurred.
Fear of What?
When prices decline, why is it as if the fear of further declines clouds people’s perceptions such that the only possibility seen is further declines? It seems the rare person indeed is the one who looks at crises as opportunities. As attributed to Winston Churchill, “Never let a crisis go to waste.”
But Of Course
When stocks decline, no one knows whether that is the harbinger of further declines, or a one time temporary event. As a result, the fear of further loss frightens many. While some investors were previously willing to pay, say $X dollars for a stock, now a few days or weeks later they are unwilling to pay less, perhaps significantly less, for the same stock, despite theoretically adhering to their principle of buy low, sell high. This is fear trouncing rational behavior.
The Space to Do
While we previously described the best time to buy dividend stocks is before a decline in prices. And here is the opinion to embrace a declining market. As detailed in When To Buy For Maximum Gains, we see that declining prices are a godsend for the dividend investor.
What Is What
Lower prices mean lower valuations most of the time. Lower valuations means that one’s dividends buy more shares than at previous higher valuation levels. Buying more shares means more future dividends. All that is a shining positive event. But many seem to eschew the chance to buy low.
Does fear overwhelm you when prices decline? Let me know here.
The illustrations of Japanese toys is from “Unai no tomo” (Book of Toys), うないのとも, a series of volumes on toys published in Japan, 1891-1923, by the artist Nishizawa Tekihō 西沢笛畝 . Courtesy Metropolitan Museum of Art (New York, N.Y.)
The post Bear Market Reactions appeared first in Smile If You Dare.