When it comes to investing, you will often hear terms like bull and bear markets or being bullish and bearish. Most of the time, these associations refer to the condition of the stock market and how the attitudes of investors towards the future look like. This article is going to briefly introduce you to the meanings of these terms.
What Is a Bull Market?
A bull market is a consistent time period in a financial market where prices are rising and buyers are encouraged to buy. In bull markets, optimism amongst investors is at an increased level and prices are expected to further rise. The demand for stocks is high as investors seek the opportunity to make profits and more and more businesses become encouraged to take their company public.
While there isn’t any official definition of how bull markets are defined, many people generally consider a 20% rise from an existing market low, as a bull market. It is nearly impossible to predict the end and beginning of both bull and bear markets. Therefore, bull markets are typically identified after they’ve already occurred. There were 12 bull markets in the history of the U.S stock market and as of early 2020, we are currently in the 13th bull run.
The stock market is heavily connected to the economy. Thus a bull market also generally comes along with an economic expansion, as most companies grow their profits, which ultimately results in decreasing unemployment and strong GDP growth.
How Long Do Bull Markets Last?
The actual length of bull and bear markets can differ from a few weeks to several years. That being said, bull markets tend to last longer than bear markets with an average duration of 4.5 years. As of early 2020, we are currently riding the longest bull market in history as it has already been going for over 10 years since the end of the bear market that lasted from 2007 to 2009 during the financial crisis. Since the current bear market exceeds the average by far, it is difficult to define how long bull markets typically last.
What Is a Bear Market?
As opposed to the bull market, there also has to be a bear market. A bear market defines a market where prices are constantly decreasing. People don’t want to raise prices any further and lose confidence, while optimism plummets. There is usually a much bigger proportion of sellers than buyers. The market can’t do anything else than to decline since everyone’s negative sentiment about the future is so widespread that price falls start to perpetuate themselves.
Similar to bull markets, most experts agree that a price decline of 20% from a recent high is defined as a bear market. Usually, what causes a bear market is a weak and slow economy along with high unemployment and low profits for businesses. Oftentimes following this is some sort of negative event, which then triggers markets to plunge, inevitably causing a bear market. This only makes sense, as the demand for stocks decreases and investor’s confidence and optimism diminish. As a result, prices fall and this discourages investors to stay invested, as they see their investments keep losing value over time.
At this point, most investors will keep on believing that there is no end coming to this movement, causing bear markets to remain until economic conditions slowly recover and investors start to see attractive investments and opportunities again.
Bulls and Bears
The terms bull and bear are not only being used to define current market conditions but can also come handy when describing the attitudes and outlooks towards a financial security. For instance, investors may say that they are bullish towards a stock, which means that they are invested in that stock with the confidence that it’s going to rise in the future.
While it is not entirely clear where these two terms really came from, the most common explanation is based on the attack motion of each animal that those terms consist of. Because the bull thrusts its horns up and forward, he is associated with the upward trend of the markets. Conversely, as a bear swipes down with its claws in a fight, it depicts the downward trend of markets.
How to Act during Bull and Bear Markets
As an investor, you might have already heard of the straightforward rule “Buy low and sell high”. While this principle seems to be simple, in reality, it is extremely hard to consistently execute these investment actions in a proper way.
In a bull market, investors can ideally make the most profit if they buy at the beginning of the bull run and sell as soon as the market reaches its peak. However, the main problem of accomplishing such an action is the fact that it’s nearly impossible to predict when a bull market is going to turn into a bear market and reverse.
If for instance, you as an investor invest your money in stocks during a bull market, what are you going to do if the stock market suddenly declines by 10%? Are you going to get out of the market because you think that it’s going to fall even more, or do you stay calm with the belief that the market hasn’t fully reached its peak yet? These are extremely hard choices to take and it is rather up to your luck if you are right or wrong on those assumptions since most experts don’t even seem to get it right for themselves.
Therefore, simply thinking that investors should just invest at the beginning of a bull market and sell when it turns into a bear market is probably not going to be very helpful in practice.
Don’t Let Your Emotions Take Control
First of all, it may be beneficial to admit the fact that nobody can consistently time the market over the long term. Then you should realize that stocks general have always gone up in the long term and they are most likely to continue like that, as productivity of companies are always going to increase throughout time. However, there are likely going to be a few market downturns and crashes along the way. This concludes that technically, investors shouldn’t be too worried if their investments decline during a bear market as they can almost be certain that the market is eventually going to recover after time.
Furthermore, if you as an investor know that you still have a long investment horizon and therefore have the time to recover from eventual investment losses, you may pick great investments in the first place and hold them as long as possible. Consequently, you won’t have to worry too much if they decline if you are still confident about them and their outlooks in the long term.
Contrarian investors, for example, would have even taken one step further and bought more shares of declining investments as they essentially become more undervalued. The key thing here is that your chosen stock picks need to be fundamentally sound and promising in the first place.
The Contrarian Approach
Perhaps you also have heard of a famous quote by Warren Buffett:
“Be fearful when others are greedy. Be greedy when others are fearful.”
This quote basically suggests to always think about certain investing principles in an opposite way than most other investors. This may not sound right for people who have heard this for the first time, but the truth is that many of the most successful investors have achieved their success by having a contrarian investing mindset.
All financial assets can be bought at a ‘normal’ price under standardized market conditions. However, as the market consists of buyers and sellers who are emotionally driven, there may be times where stocks might trade at a much higher (or lower) price than what they are actually worth. It is up to you as an investor to find and buy those stocks that are priced at a bargain to what they would normally be sold.
Technically, the best time to find such bargains would be during bear markets, where nearly everyone is not willing to invest, simply because the whole market is shaped by fear and pessimism. Many great companies lose their share price for literally no fundamental reason. As a result, they become undervalued. Conversely, in times when bull markets continue to rise and everything seems to never find an ending, it’s the time to rather be cautious and fearful, as most equities become overvalued.
That being said, always acting on the contrary side can be really hard, especially when investors don’t have enough patience and can’t keep their emotions fully under control. One of the best ways to avoid regretful choices that are caused by feelings is to know what you are really doing in the first place and understanding every investment decision you make. The worst thing that can happen is to suddenly sell your investments shortly after you constantly see negative news reports in the media and falling prices without actually understanding what is happening to the companies that you own.