Bottom calling is difficult even in bull markets, but in a bear market, it becomes that much more complex. With the concern of naked short selling, along with the talk that investment banks are holding more shares short than actually exist, buying at a bottom makes even less sense. In these bear market cycles, good stocks rise to the top, while the bad are eradicated from the market by shorts.
Buy high, sell higher
There are many reasons why buying rising stocks make much more sense than buying a giant at discounted rates. Though famed investor Warren Buffett has made billions of dollars buying cheap stocks at a bad time, it wasn’t in bear markets. Instead, most of his largest investments were made in quality companies that had a temporary blip in their performance. Buying companies when they’ve fallen off their prime has proved profitable, but the average trader has very little information when compared to investing giants.
There are many reasons why high fliers fly better when the market is in a tailspin; here are some suggestions and input on why buying rising stocks makes sense.
Quality over quantity
Owning a good business is far better than owning many mediocre businesses. Only the best of companies will see higher stock prices when the rest of the market is selling off. Even defensive names are not immune to the troubles of bear market selling and short selling; each company must prove to be profitable in any economic wave to attract the capital of big investors.
Investors want the best in bear markets
After selling off their lagging names, where do investors turn next? Either short term bonds or strong companies. For example, McDonalds has fared well through the bear market and makes this economic period look just like any other. Its business is strong and investors are happy to pay a premium to make sure they get a quality company. Look at WalMart, whose sales have done even better in recession; they’re discounting the rest of the retailers, and customers are finding their low prices to be a good trade off, even with long checkout times.
There are plenty of terrible names that can be shorted to bankruptcy, and in bear markets, those companies are usually removed completely. Rather than short sell a stock making new highs, investors would rather pile on the shorts on a stock destined to fail. No one wants to be against a rising bull, but are perfectly willing to short the life out of smaller companies that aren’t churning profits. In bull markets, the contrarians are selling, but in bear markets, they’re buying heavy the quality companies.