For those who want to start as stock investors in bearish periods, this seems to be good opportunities for profit. But you must have excellent bear market investing strategies to invest and earn in a bearish stock market.

No doubt that bear market is critical periods in which to invest seems impossible. This is since not only the returns are not high but can be negative too, but there is a commandment applying expert investors in times like this. You can always find great opportunities by followin a predetermined strategy.

To succeed in this time, every conventional strategies can be applied. But you may try the more risky; even investors may use tricks that can be appllied only on turbulent times. Those tips and strategies are created based on an investor profile, defensive or aggressive; everything depends on the courage of the investor.

The following strategies are aimed at small and medium investors like you. All aims and purposes are to achieve profitability in this troubled period. Applying in the prime market involves much knowledge, so in addition to the strategy itself, it requires sensitivity.

Values refuge: they are the values that best behave in equities, are also known as “safe havens” and often receive a lot of investment in times of crisis or instability. The most common is that these values are those belonging to the utilities, construction, and similar companies; clear that for the case of Spain the rule of construction does not apply. An excellent example of value is Telefonica and Repsol refuge as both have good growth prospects.

Securities with dividend: the accumulation of values that provide dividend is recommended in extreme cases because they tend to be more conservative. This is to monetize investments in securities when dividends are above inflation, they can go in many directions from banks such as Santander, BBVA, to Endesa, Iberdrola, including Tele 5.

Abstention: avoid taking positions in volatile times is a more cautious attitudes that an investor can make, plus it lets you view and analyze the market situation objectively, it also ensures you can take advantage of low prices of the weaker companies . The only downside to taking this position is that the investor has to know exactly when to abstain and when to act without his opportunities pass.

Speculate: knowledge of the heaters used to stagger the listing of a sudden stock market value, either by rumors, entry of new shareholders or corporate movements, trade investor is more aggressive than their investments based on speculation. It is certainly a cost effective option, but few know the advantage.

The game: to be attentive to opportunities and “offers” market when the trend is down is very important because it is always possible to find a company whose growth is positive over the other. Be on the lookout is essential.

Strong values: one of the more conventional approaches is choosing to invest in companies with established business line, ie history taking because these bears are more resistant to periods better than the recently opened. With companies of this kind in your investment portfolio will achieve strength and stability, even in adverse times.

Consider these tips in times of crisis and instability can enhance a portfolio, without doubt bring a lot of stability and security. Those are top list of bear market investing strategies for you to follow.

The capital allocation line shows the risk-return trade-offs available by mixing risk-free as- sets with the investor’s risky portfolio. Investors can choose the assets included in the risky portfolio using either passive or active strategies. A passive investing strategy is based on the premise that securities are fairly priced and it avoids the costs involved in undertaking security analysis. Such a strategy might at first blush appear to be naive. However, we know that intense competition among professional money managers might indeed force security prices to levels at which further security analysis is unlikely to turn up significant profit opportunities. Passive investment strategies may make sense for many investors.

To avoid the costs of acquiring information on any individual stock or group of stocks, we may follow a “neutral” diversification approach. A natural strategy is to select a diversified portfolio of common stocks that mirrors the corporate sector of the broad economy. This results in a value-weighted portfolio, which, for example, invests a proportion in GM stock that equals the ratio of GM’s market value to the market value of all listed stocks.

Such strategies are called indexing investing. The investor chooses a portfolio with all the stocks in a broad market index such as the Standard & Poor’s 500 index. The rate of return on the portfolio then replicates the return on the index. Indexing investing has become an extremely popular strategy for passive investors. We call the capital allocation line provided by one-month T-bills and a broad index of common stocks the capital market line . That is, a passive strategy based on stocks and bills generates an investment opportunity set that is represented by the capital market line.

Historical Evidence on the Capital Market Line

Can we use past data to help forecast the risk-return trade-off offered by the capital market line? The notion that one can use historical returns to forecast the future seems straightforward but actually is somewhat problematic. On one hand, you wish to use all available data to obtain a large sample. But when using long time series, old data may no longer be representative of future circumstances. Another reason for weeding out subperiods is that some past events simply may be too improbable to be given equal weight with results from other periods. Do the data we have pose this problem?

The most plausible explanation for the variation in sub period returns is based on the observation that the standard deviation of returns is quite large in all sub periods. If we take the76-year standard deviation of 20.3% as representative and assume that returns in one year are nearly uncorrelated with those in other years (the evidence suggests that any correlation across years is small), then the standard deviation of our estimate of the mean return in any of our 19-year sub periods will be 20.3/, which is fairly large. This means that in approximately one out of three cases, a 19-year average will deviate by 4.7% or more from the true mean. Applying this insight to the data tells us that we cannot reject with any confidence the possibility that the true mean is similar in all sub periods! In other words, the “noise” in the data is so large that we simply cannot make reliable inferences from average returns in any sub period. The variation in returns across sub periods may simply reflect statistical variation, and we have to reconcile ourselves to the fact that the market return and the reward-to-variability ratio for passive (as well as active!) strategies is simply very hard to predict.

The instability of average excess return on stocks over the 19-year sub also calls into question the precision of the 76-year average excess return (8.64%) as an estimate of the risk premium on stocks looking into the future. In fact, there has been considerable recent debate among financial economists about the “true” equity risk premium, with an emerging consensus that the historical average is an unrealistically high estimate of the future risk premium. This argument is based on several factors: the use of longer time periods in which equity returns are examined; a broad range of countries rather than just the U.S. in which excess returns are computed (Dimson, Marsh, and Staunton, 2001); direct surveys of financial executives about their expectations for stock market returns (Graham and Harvey, 2001); and inferences from stock market data about investor expectations (Jagannathan, McGrattan, and Scherbina, 2000; Fama and French, 2002). The nearby box discusses some of this evidence.

Costs and Benefits of Passive Investing Strategy

How reasonable is it for an investor to pursue a passive investment strategy? We cannot answer such a question definitively without comparing passive strategy results to the costs and benefits accruing to an active portfolio strategy. Some issues are worth considering, however.

First, the alternative active strategy entails costs. Whether you choose to invest your own valuable time to acquire the information needed to generate an optimal active portfolio of risky assets or whether you delegate the task to a professional who will charge a fee, constructing an active portfolio is more expensive than constructing a passive one. The passive portfolio requires only small commissions on purchases of U.S. T-bills (or zero commissions if you purchase bills directly from the government) and management fees to a mutual fund company that offers a market index fund to the public. An index fund has the lowest operating expenses of all mutual stock funds because it requires minimal effort.

A second argument supporting a passive strategy is the free-rider benefit. If you assume there are many active, knowledgeable investors who quickly bid up prices of undervalued assets and offer down overvalued assets (by selling), you have to conclude that most of the time most assets will be fairly priced. Therefore, a well-diversified portfolio of common stock will be a reasonably fair buy, and the passive strategy may not be inferior to that of the average active investor. To summarize, a passive strategy involves investment in two passive portfolios: virtually risk-free short-term T-bills (or a money market fund) and a fund of common stocks that mimics a broad market index. Recall that the capital allocation line representing such a strategy is called the capital market line. We see that using 1926 to 2001 data, the passive risky portfolio has offered an average excess return of 8.6% with a standard deviation of 20.7%, resulting in a reward-to-variability ratio of 0.42.

It would be a mistake to think that all the facts that describe a particular investment are or could be known. Not only may questions remain unanswered; all the right questions may not even have been asked. Even if the present could somehow be perfectly understood, most investments are dependent on outcomes that cannot be accurately foreseen. – Seth Klarman -

Klarman describes it well. There is a lot of uncertainty investors must deal with in every investment. You can never know all there is to know. And you can and will make mistakes. For these reasons, I love Graham’s concept of a margin of safety.

The margin of safety concept is the idea that you want to buy an investment at a price that gives you room for uncertainties and errors. As Benjamin Graham David and Dodd say:

The safety sought in investment is not absolute or complete; the word means, rather, protection against loss under all normal or reasonably likely conditions or variations . . . . A safe stock is one which holds every prospect of being worth the price paid except under quite unlikely contingencies.

Buffett describes the margin of safety this way: “When you build a bridge, you insist it can carry 30,000 pounds, but you only drive 10,000 – pound trucks across it. And that same principle works in investing. ” The best way I’ve found to ensure some margin of safety in your investments is to think about asset values — indeed, a focus on buying tangible assets at a discount is a great way to lower risk and still enjoy sweet returns.

What are tangible assets? These are the things you can see, touch, and count — things like buildings and real estate, cash, barrels of oil, hydroelectric dams, water rights, timberlands, factories, and more. Perhaps it is easier to understand tangible assets by comparing them to intangible ones. Intangible assets are things like goodwill, development costs, and even licenses or brand names.

And what do I mean by buying tangible assets at a discount? By “discount” I’ m referring again to the two- market model. We know the stock price in the publicly traded market. That is the market we are going to buy from or sell into, as the case may be. But we don ’ t have to accept that price as an accurate statement of value. So in trying to figure out if we can buy at a discount, we have to try to break down our investments into pieces we can understand, compare these pieces to private market values, and therefore value the whole.

In my newsletter, I’ve always expressed a preference for buying tangible assets, which is a great opportunity when you can find it. Buying tangible assets is a high – percentage play.

Let me again borrow from Klarman, who writes in his book:

Tangible assets . . . are more precisely valued and therefore provide investors with greater protection from loss. Tangible assets usually have value in alternate uses, thereby providing a margin of safety. If a chain of retail stores becomes unprofitable, for example, the inventories can be liquidated, leases transferred, and real estate sold.

Conversely, when it comes to buying a well – known soft – drink company like Dr. Pepper, you will probably wind up paying a high price relative to its underlying book value, because the market gives a lot of value to — or credit for — the Dr. Pepper brand. But, as Klarman says, “ if consumers lose their taste for Dr. Pepper, by contrast, tangible assets will not meaningfully cushion investors ’ losses. ”

Here he is emphasizing the role of tangible assets in creating a cushion to protect against adversity — again, a margin of safety. We’ll see that buying companies with loads of tangible assets can also be a source of future wealth creation.

So how do we think about asset values?

The first proxy is simple book value, which, counter to its name, is not a value per se. This number is readily available and is simply a product of accounting conventions. Still, it is a good starting place from which you can make adjustments. You can find book value on most financial sites. Or you can look at a balance sheet and use the total stockholders’ equity number. (If you prefer to think in terms of book value per share, you can just take the total stockholders’ equity number and divide it by the total number of shares outstanding.)

The first adjustment I make is to strip out intangibles. I always work with a tangible book value — for the reasons we’ve just covered. Once you have that, you can mark down any other assets you think are not worth much, or you can add value to assets that are not on the balance sheet or are not valued at current market prices.

The classic example is a company that bought real estate years ago and now is sitting on property that has doubled or tripled over that time: accounting convention requires that these assets be depreciated over time, or written off little by little every year. IRSA carried that big parcel of land on their books at $ 39 million. That was the price they had paid years before. The land was now worth probably 15 times that amount.

The essential idea is to go over a company’ s balance sheet, think about the company’s assets, and try to put some values in those assets.

Even if you make only minimal adjustments — even if all you do is use tangible book value — you ’ ll already be ahead of most investors. At worst, using only the simple price – to – book value is not a bad anchor to windward, if you also pay attention to the other factors we’ve covered — like cash flow. So now you have three important concepts introduced:

1. Think about whole companies.
2. Think about cash flows.
3. Think about asset values.

If you are in the market for an investment loan one thing you should remember is that just like your investment decision process as to which property or shares you might wish to acquire determining the right investment loan for your acquisition should be a thorough process because there is no doubt it having the right investment loan will impact positively on your ultimate investment return.

It may be that you simply feel that a standard principal and interest loan that suits a home purchase will also work for your investment property purchase. This is not the case. Most investors are well aware that taking an interest only term is for an investment loan is more tax efficient in that one avoids repaying principal and can instead apply that principal you might have had to pay on your investment loan to the reduction of any non-deductible home loan or personal debt (interest on personal debt is paid in after-tax dollars so is much more costly to you). Until fairly recently the maximum interest only period you may have been able to negotiate on an investment loan was 5 years.

Today you can take an initial ten year interest only period on your investment loan and thereby keep your monthly repayments on the investment loan to a minimum during that time. By structuring your investment loan this way you ensure that should there be a vacancy with your investment property or should dividends on your shares not be as high as expected, then at least you are not digging into your salary to make the principal component repayment on your investment loan.

Similarly you can put money aside for maintenance and repairs as opposed to making principal repayments on your investment loan. You may not be aware but today most interest only investment loans (or home loans for that matter) do allow a borrower to make additional repayments of principal if they so desire. This provides all the more reason to go interest only because by doing so you achieve the maximum flexibility and choice with your investment loan repayments. The first tip for your investment loan is therefore to include the longest available interest only period on offer. In addition to the interest only feature of an investment loan another feature you should always look to include in your investment loan package is a line of credit facility which you only used to meet any shortfall in interest (after applying rental payments) as well as any other costs that you may incur in relation to your investment property or share portfolio.

The line of credit firstly provides you with a buffer – it ensures that if there is a vacancy then you are not having to rely on your personal income to meet the repayments required on your investment loan. Instead you can draw down on the investment line of credit to meet the interest payments while you advertise for another tenant. You can also utilise the line of credit to meet any one-off unexpected payments that might be required for maintenance reasons – a failed hot water system, leaking roof, or other maintenance issue can be an expensive exercise to repair and having the safety net of a line of credit cover repayment of these and any interest shortfall on your investment loan.

The second tip then is to include an investment line of credit within your investment loan package ( reiterating that you must only use the line of credit for investment use because if you draw on it for personal use then the ATO will regard the borrowing as mixed borrowings and you will need to then apportion repayments you do make between personal and investment loan debt. Utilising the line of credit for both investment and personal use also caused grief for your accountant at tax time – it can be a nightmare trying to extract what is investment loan debt vs personal debt when calculating what is tax deductible and non-deductible interest.

An investment portfolio is simply a collection of investment assets. Once the portfolio is established, it is updated or “rebalanced” by selling existing securities and using the proceeds to buy new securities, by investing additional funds to increase the overall size of the portfolio, or by selling securities to decrease the size of investment portfolio.

Investment assets can be categorized into broad investment asset classes, such as stocks, bonds, real estate, commodities, and so on. Investors make two types of decisions in constructing their portfolios. The investment asset allocation is the choice among these broad asset classes, while the security selection decision is the choice of which particular securities to hold within each investment asset class.

The decision to mix and determine which of asset allocation to hold in your investment portfolio is a very personal choice or preferences one. You should realize that asset allocation that works best for you is depend on other things. Most of the time it will determine with your time horizon of investing and your risk tolerance.

There are 2 main approach to build investment portfolio: top-down and bottom-up strategy. A “top-down” portfolio construction starts with investment asset allocation. One individual who currently holds all of his money in a bank account would first decide what proportion of the overall portfolio ought to be moved. Either if he/she want to put it into stocks, bonds, and other investment vehicles which suitable. By doing this, the broad features investment portfolio are established. For example, while the average annualized return on the common stock of large firms since 1920s has been about 11-12% per year, the average return on U.S. Treasury Bills has been only 3.8%. Then again, if you compare stocks and US Treasury Bills, stocks are more riskier, with annual returns that have ranged as low as 46% and as high as 55%. Treasury Bills in contrast, may have returns that are effectively risk-free. When you opted for U.S Treasury Bills, you know what interest rate you will earn when you buy one.

Therefore, the decision to allocate your investments to the stock market or to the money market where Treasury bills are traded will have great ramifications for both the risk and the return of your investment portfolio. A top-down investor first makes this and other crucial investment asset allocation decision before turning to the decision of the particular securities to be held in investment asset classes.

Security analysis involves the valuation of particular securities that might be included in the portfolio. For example, an investor might ask whether Merck or Pfizer is more attractively priced. Both bonds and stocks must be evaluated for investment attractiveness, but valuation is far more difficult for stocks because a stock’s performance usually is far more sensitive to the condition of the issuing firm.

The “bottom-up” strategy had a contrast approach compare to top-down approach. In this process, the portfolio is constructed from the securities that seem attractively priced without as much concern for the resultant asset allocation decision. Such a technique can result in unintended bets on one or another sector of the economy. For example, it might turn out that the investment portfolio ends up with a very heavy representation of firms in one industry, from one part of the country, or with exposure to one source of uncertainty. However, a bottom-up strategy does focus the portfolio on the assets that seem to offer the most attractive investment opportunities.

Please take note one the main principles of investment before deciding your investment asset allocation. It is about risk and reward. When it comes to investing, risk and reward are inextricably knitted. You have probably learned the phrase: no pain, no gain. This phrase is totting up risk and reward relationship. You should not let anyone tell you differently: All investments involve some degree of risk.