Strategy during crisis investment: Revisiting the recent 2008 bear market

Strategy during crisis investment: Revisiting the recent 2008 bear market

https://myinvestingnotes.blogspot.com/2010/02/strategy-during-crisis-investment.html

Here is a summary of the key points regarding investment strategy during a crisis, using the 2008 bear market as a context:

Core Philosophy:

• The goal is to "buy low and sell high," not to time the market perfectly. Buying during a downturn may lead to short-term losses, but it positions an investor for probable long-term gains.

• A crisis presents opportunities because stock prices can detach from intrinsic value, creating undervalued situations (e.g., stocks trading below book value, with high earnings yields, and attractive dividends).

The Challenge of Timing the Bottom:

• It is impossible to know where or when the market bottom will occur. The bottom is often only recognized in hindsight.

• The market typically recovers before the economy or investor sentiment improves, meaning the best buying opportunities occur amid negative news and pessimism.

Recommended Strategy: Staggered Buying

• Instead of trying to time the bottom with a single lump-sum ("bullet") investment, the preferred method is staggered buying.

• This involves investing a pre-determined amount in equal portions over time (e.g., monthly or quarterly), a method similar to dollar-cost averaging.

• This strategy reduces the anxiety of market timing, mitigates the risk of investing everything at the wrong time, and ensures participation in the market when it is undervalued.

Conclusion:
The intelligent approach during a crisis is not to ask "when is the bottom?" but "how much to buy?" By accepting the risks and using a staggered investment plan, investors can navigate the downturn and position themselves for a profitable recovery.

=====

Detailed discussion below:

A classic value-investing approach to navigating a bear market, using the 2008 financial crisis as its backdrop. Let's break down its core arguments:

1. The Core Philosophy: Value Over Timing

• Thesis: The primary goal is to acquire assets when they are undervalued relative to their intrinsic worth, not to pinpoint the exact market bottom. The article acknowledges that short-term losses are likely unless one is exceptionally lucky, but it frames these as the cost of admission for long-term gains.

• Justification for Buying: The author provides concrete examples of value:

  • Banks at Book Value: Buying a dollar of assets for a dollar.

  • Property at a Discount: Buying assets for 50 cents on the dollar.

  • Utility Stocks with High Earnings Yield: A 10% earnings yield (inverse of P/E) is compared favorably to low-risk bond yields, suggesting a strong return on investment.

  • High Dividend Yields: Income that is significantly better than cash in the bank.

• The Buffett Endorsement: Citing Warren Buffett serves two purposes: it provides authority and reinforces the idea that the market is a voting machine in the short run (driven by sentiment) but a weighing machine in the long run (driven by value). The key takeaway from the quote is that the market will recover before the news turns positive.

2. Addressing the Primary Risk: "Catching a Falling Knife"

• Acknowledgment: The article wisely concedes the main counter-argument—that buying too early leads to immediate paper losses. This builds credibility.

• Reframing the Problem: It argues that since finding the bottom is impossible ("an apparent bottom now may not be the eventual bottom"), the question itself is flawed. The real problem is not timing but participation. If you wait for clear signs of a bottom, you will have already missed a significant portion of the recovery.

3. The Proposed Solution: Staggered Buying (Dollar-Cost Averaging)

• The "How" vs. "When": The article shifts the investor's focus from the unanswerable ("When to buy?") to the actionable ("How much to buy?").

• Mechanics of Staggered Buying: This involves dividing a lump sum into smaller, equal parts and investing them at predetermined intervals (e.g., 10 portions over 10 months).

• Psychological Benefits: This strategy is praised for reducing the anxiety of market timing. It mitigates the fear of a further downturn (if you invest everything at once) and the fear of missing out (if you stay entirely in cash). It provides a disciplined framework that removes emotion from the decision-making process.

---

Critical Discussion of the Article's Points

While the article provides a sound and time-tested framework, a critical discussion reveals several nuances and potential pitfalls.

Strengths:

1. Psychologically Astute: The advice is excellent for managing investor behavior, which is often the biggest determinant of success. Staggered buying prevents panic and promotes discipline.

2. Fundamentally Sound: The core principle of buying undervalued assets during a panic is a cornerstone of value investing and has been proven successful over decades.

3. Humble and Realistic: It correctly identifies the futility of market timing, which is a trap for most investors.

Weaknesses and Critical Considerations:

1. The Definition of "Value" is Presumed: The article's biggest weakness is its assumption that identifying "value" is straightforward.

   • Value Traps: A bank trading at 1x book value is only a good deal if the book value is accurate. During 2008, many bank assets (like mortgage-backed securities) were dramatically overvalued on their books. What appears to be "1x book" could actually be "2x a much lower, realistic book value." This is known as a value trap—a stock that looks cheap but is cheap for a fundamental reason that will not improve.

   • Earnings Collapse: A single-digit P/E is meaningless if earnings (the 'E') are about to collapse. In a severe recession, cyclical companies can see earnings evaporate, making a "low P/E" stock suddenly very expensive.

2. The Liquidity and Capital Requirement: Staggered investing requires a significant pool of idle capital and the emotional fortitude to deploy it when the world appears to be ending. Most retail investors are fully invested during a bull market and do not have a large cash reserve ready for a crisis. Furthermore, watching your first few investments fall 20-30% can be psychologically devastating, causing many to abandon the plan.

3. Opportunity Cost of Staggered Buying: While reducing risk, dollar-cost averaging (DCA) in a sharply recovering market has a major downside: missing out on larger gains. Historical analysis often shows that lump-sum investing at a point of peak fear outperforms DCA, because the initial rebound is so powerful. The article's strategy is designed to minimize regret, not necessarily to maximize returns.

4. Lack of a Sell Discipline: The article focuses entirely on the "buy" decision. A complete strategy must also address when to sell. Should you sell when the stock reaches its calculated intrinsic value? Or when the broader market becomes overvalued? Without an exit strategy, investors risk holding on through the next cycle and giving back their gains.

5. Underestimation of Systemic Risk: The 2008 crisis was not a typical recession; it was a systemic event where the entire financial system was at risk of collapse. The article's tone, while cautious, may understate the real possibility that "this time is different." In a true depression, even the best companies can fail, and markets can stay undervalued for years (e.g., Japan after 1990). The strategy assumes mean reversion, which is a powerful force, but not a guaranteed one in the short-to-medium term.

Conclusion

The article offers a rational and historically validated blueprint for crisis investing. Its emphasis on value, discipline, and staggered purchases is a powerful antidote to the emotional decision-making that destroys wealth during panics.

However, an investor must be aware of its limitations. The critical takeaways are:

• Do your own deep due diligence to avoid value traps. Cheap can always get cheaper if the fundamentals are broken.

• Ensure you have the capital and psychological stamina to execute the plan through extreme volatility.

• Understand that staggered buying is a risk-management tool, not a return-maximization tool.

• Develop a full strategy that includes criteria for both buying and selling.

In essence, the article is correct in its philosophy, but its successful execution is far more challenging than it appears. It requires not just capital, but also deep conviction, independent analysis, and iron-clad discipline.

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Strategy during crisis investment: Revisiting the recent 2008 bear market

FRIDAY, FEBRUARY 26, 2010

Strategy during crisis investment: Revisiting the recent 2008 bear market

Although we may not know where the bear bottom is, buying in a down market may still lead to losing money. This is definitely true. As long as the purchase is not at market bottom, it may still result in losses for the time being. This is likely to be a short-term loss but compensated by a probable long-term gain. Even if we cannot time the market perfectly, we are definitely better off to “buy low and sell high” then to “buy high and sell low”.

----
 
Prices fell but value intact

Presently stock prices have fallen sharply. 

• Banks are trading at 1x book value, 
• property stocks sold at 50% discount from net asset value, 
• utility stocks trading at single-digit price-earnings ratio providing an earnings yield of more than 10% net of tax and 
• there are many good stocks trading at dividend yield of 2x bank interest rates. 

----

Warren Buffett, the second richest man in the world who makes his fortune from stock investment, is busy buying undervalued companies. He sees the value and he also sees prices detaching away from the intrinsic values.He said: “I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turn up.”

----

Catching a falling knife

Some may argue that buying now is like catching a falling knife. If you are not careful, you may be hurt and suffer more losses from falling stock prices.There is no doubt that we may incur short-term losses as long as we do not buy at the bottom. On the other hand, who can determine where and when is the bottom. As long as there are still unknown events or hidden problems, an apparent bottom now may not be the eventual bottom.Since we do not have all the information in the market, it is almost impossible to guess where the bottom will be.

---- 

In most cases, we only realise the bottom after it is over and by that time stock prices are running high with much improved market confidence. Market bottom could be there only for a short period. In most cases, market did not stay at the bottom waiting for investors. It will just move on.

----

Since market moves ahead of the economy by about six months, the market bottoms out when the economy is still gloomy, news are still negative, analysts are still calling underweights and most investors are staying at the sidelines.

----

Handling something we know is definitely much easier than dealing with the unknown risks, something which hits from behind without warning.When we invest during a crisis we actually go in with our eyes open. We know it is definitely risky but we also know it could also be very profitable. If we can handle the risk, the risk-reward trade-off will be very rewarding.

----

Emphasise strategies

What we need is to buy near the bottom, not right at the bottom. Investors’ frequent question now is when to buy, that is where is the bottom? Perhaps it is more intelligent to ask how much to buy now since nobody will be able to guess where is the market bottom.

---- 

Staggered buying is preferred over bullet purchase which is taking the risk of timing the market bottom. In staggered buying, a pre-determined amount will be set aside for investment over time, say in 10 equal portions. 

One common method of staggered investment is dollar cost averaging, an investment scheme made in equal portions periodically, either by a small amount monthly or larger amount quarterly. There are also several variations of staggered investment.

----

Anyway, staggered purchase is a preferred method to avoid the anxiety of market timing and the mixed feeling of fear of further downside and worry of missing the market rebound. As long as the market is undervalued, the strategy of staggered investment ensures that investors are in and are benefiting from the undervalued market. 


http://klsecounters.blogspot.com/2008/11/strategy-during-crisis-investment.html  

http://myinvestingnotes.blogspot.com/2010/02/strategy-during-crisis-investment.html

Newspaper Articles predicting the Market Bottom of March 2009

A market bottoms when we reach what is known as the "point of maximum pessimism". This means that investors have lost so much money they completely throw in the towel - and shares correct to an undervalued level.


"All the things are in place for the bear market to have ended," he said. "When there's a strong consensus, a very negative one, and cash positions are very high, as they are at the moment, I'd like to bet against that."



http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5252775/FTSEs-11-week-high-sparks-hope-that-bull-market-may-be-arriving.html

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5252775/FTSEs-11-week-high-sparks-hope-that-bull-market-may-be-arriving.html

Strategy during crisis investment: Revisiting the recent 2008 bear market

Although we may not know where the bear bottom is, buying in a down market may still lead to losing money. This is definitely true. As long as the purchase is not at market bottom, it may still result in losses for the time being. This is likely to be a short-term loss but compensated by a probable long-term gain. Even if we cannot time the market perfectly, we are definitely better off to “buy low and sell high” then to “buy high and sell low”.

----
 
Prices fell but value intact

Presently stock prices have fallen sharply. 

• Banks are trading at 1x book value, 
• property stocks sold at 50% discount from net asset value, 
• utility stocks trading at single-digit price-earnings ratio providing an earnings yield of more than 10% net of tax and 
• there are many good stocks trading at dividend yield of 2x bank interest rates. 

----

Warren Buffett, the second richest man in the world who makes his fortune from stock investment, is busy buying undervalued companies. He sees the value and he also sees prices detaching away from the intrinsic values. He said: “I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turn up.”  

----

Catching a falling knife

Some may argue that buying now is like catching a falling knife. If you are not careful, you may be hurt and suffer more losses from falling stock prices. There is no doubt that we may incur short-term losses as long as we do not buy at the bottom. On the other hand, who can determine where and when is the bottom. As long as there are still unknown events or hidden problems, an apparent bottom now may not be the eventual bottom. Since we do not have all the information in the market, it is almost impossible to guess where the bottom will be.

----

In most cases, we only realise the bottom after it is over and by that time stock prices are running high with much improved market confidence. Market bottom could be there only for a short period. In most cases, market did not stay at the bottom waiting for investors. It will just move on.

----

Since market moves ahead of the economy by about six months, the market bottoms out when the economy is still gloomy, news are still negative, analysts are still calling underweights and most investors are staying at the sidelines. 

----

Handling something we know is definitely much easier than dealing with the unknown risks, something which hits from behind without warning. When we invest during a crisis we actually go in with our eyes open. We know it is definitely risky but we also know it could also be very profitable. If we can handle the risk, the risk-reward trade-off will be very rewarding.

----

Emphasise strategies

What we need is to buy near the bottom, not right at the bottom. Investors’ frequent question now is when to buy, that is where is the bottom? Perhaps it is more intelligent to ask how much to buy now since nobody will be able to guess where is the market bottom.

----

Staggered buying is preferred over bullet purchase which is taking the risk of timing the market bottom. In staggered buying, a pre-determined amount will be set aside for investment over time, say in 10 equal portions.

One common method of staggered investment is dollar cost averaging, an investment scheme made in equal portions periodically, either by a small amount monthly or larger amount quarterly. There are also several variations of staggered investment.

----

Anyway, staggered purchase is a preferred method to avoid the anxiety of market timing and the mixed feeling of fear of further downside and worry of missing the market rebound. As long as the market is undervalued, the strategy of staggered investment ensures that investors are in and are benefiting from the undervalued market. 

http://klsecounters.blogspot.com/2008/11/strategy-during-crisis-investment.html    

====

Summary:

Here is a summary of the key points regarding investment strategy during a crisis, using the 2008 bear market as a context:

Core Philosophy:

• The goal is to "buy low and sell high," not to time the market perfectly. Buying during a downturn may lead to short-term losses, but it positions an investor for probable long-term gains.

• A crisis presents opportunities because stock prices can detach from intrinsic value, creating undervalued situations (e.g., stocks trading below book value, with high earnings yields, and attractive dividends).

The Challenge of Timing the Bottom:

• It is impossible to know where or when the market bottom will occur. The bottom is often only recognized in hindsight.

• The market typically recovers before the economy or investor sentiment improves, meaning the best buying opportunities occur amid negative news and pessimism.

Recommended Strategy: Staggered Buying

• Instead of trying to time the bottom with a single lump-sum ("bullet") investment, the preferred method is staggered buying.

• This involves investing a pre-determined amount in equal portions over time (e.g., monthly or quarterly), a method similar to dollar-cost averaging.

• This strategy reduces the anxiety of market timing, mitigates the risk of investing everything at the wrong time, and ensures participation in the market when it is undervalued.

Conclusion:
The intelligent approach during a crisis is not to ask "when is the bottom?" but "how much to buy?" By accepting the risks and using a staggered investment plan, investors can navigate the downturn and position themselves for a profitable recovery.

A more detailed discussion - click this link:

https://myinvestingnotes.blogspot.com/2025/11/strategy-during-crisis-investment.html

Market bottoms

A market bottoms when we reach what is known as the "point of maximum pessimism". This means that investors have lost so much money they completely throw in the towel - and shares correct to an undervalued level.

Spotting A Market Bottom

Spotting A Market Bottom
by Chris Seabury (Contact Author Biography)

Stock market bottoms can be challenging to spot. And many times, investors think that they have found this point, only for the major averages to head even lower. The big question many have is: just how do you know when a market bottom has taken place? This requires the tools and indicators that have identified major market bottoms in the past, and an understanding of what they are, how they work and that each indicator must correlate a similar reading.

Stock Market Bottoms

Since the end of World War II, stock prices have generally bottomed six months into a recession. Once it becomes official that the country is in a recession, it is generally a rearview mirror indicator meaning that there have already been two or more quarters of negative GDP growth. On the other hand, when we are emerging out of a recession, we will not know until many months later. This is one of the reasons that it can be so confusing for investors to spot major bottoms taking place. (Learn more about taking advantage of an unstable market, read Profiting From Panic Selling.)

Things to Watch for

Just imagine how wonderful it would have been to buy stocks at bargain prices before major upward moves, such as January, 1975, August, 1982, or even March, 2003. All of those periods share some common patterns that should be observed in order to determine if the market is bottoming.

The Double Bottom Pattern

The double bottom pattern is considered to be one of the most reliable of all the technical patterns. In this pattern, the major market averages will hit a low on heavy volume, then bounce back up and then retest the previous low on light volume.

The key is to watch and see how the averages trade when approaching that second low point. If the averages have a sizable break below the previous low, it is advisable to watch and see what happens. However, if the averages test that low point and then have some type of reversal, this could be a sign that a double bottom pattern is forming.

A second area to watch is volume. This is the total amount of buying and selling that is occurring. Generally, heavy volume on up or down moves shows strong conviction from either the buyers or sellers. When you see the volume lighten up on the downward moves and increase substantially on the upward moves, there is a large amount of buying taking place. After a major market bottom has occurred, you will see this heavy volume accompanied by a strong upward move in the major market averages.

Economic Numbers

Generally, the stock market will bottom and start moving higher before you see it represented in economic numbers or headlines. In many cases, the more negative economic news headlines you see, the better. When the press represents the psychology of the moment, and we start to see consistent headlines showing how bad the economy is, it suggests that the sentiment of the crowd has become so negative that the vast majority have already moved out of their positions.

A second number to pay attention to is the consumer confidence index. During and after market bottoms have occurred, you will see consumer spending and consumer confidence increase. When this happens, consumers are spending more money and corporate earnings are starting to rise.

A third economic number to watch is purchasing managers' index, which measures the economic health of the manufacturing sector. When these two numbers have bottomed, then started to consistently rise for more than three months in a row, the manufacturing and service sectors are on the road to expansion once again. (For further reading, see Economic Indicators For The Do-It-Yourself Investor.)

High Yield Bonds

Another indicator to watch is the high yield bond spread. High yield bonds are the bonds issued by companies who have a high possibility of default. To be able to attract investors to loan them money, they have to offer a higher interest rate. When lending standards are becoming easier, you will see the amount of interest or the spreads on these bonds drop. When this happens, it is a sign that investors and banks are becoming more willing to take risk. This would signal that economic conditions are starting to improve. (For more, see Top 6 Uses For Bonds.)

Copper Prices

Copper prices are a good indicator as to how strong or weak the global economy is. This metal is used in economic expansion in products such as pipes, radiators, air conditioners, electronics and computers, to name a few. Watching to see if the price of copper has bottomed or has room to fall further will help determine the overall worldwide demand for the metal. When demand has increased, you will start to see prices rise; when demand is falling, prices will follow.

Look for copper prices to finish declining and start to move in a similar upward pattern with the financial markets. This would be a real-time signal that manufacturers and home builders are seeing their businesses pick up. To keep up with the increases in demand, they have to use more copper, causing the price to rise. (For more, see Guard Your Portfolio With Defensive Stocks.)

The Bottom Line

Market bottoms are accompanied by a variety of factors, such as:

• high amounts of fear,
• a decrease in the volume on downward moves,
• a large increase in the volume on upward moves,
• double bottom patterns,
• improving economic numbers,
• the spread on high yield bonds narrowing and
• an increase in copper prices.

However, it is important to remember that the financial markets look forward at least six months prior to any real improvement in the economic numbers. By using all of the indicators together, you have the key to spotting a market bottom. (For more, see Market Bottom: Are We There Yet?)

by Chris Seabury, (Contact Author Biography)

http://www.investopedia.com/articles/economics/09/spotting-a-market-bottom.asp