To Sell Or Hold Blue Chips In A Bear Market?

The global economy is headed for a recession and the stock market decline is well underway – investors will not touch stocks with a barge pole. I do not foresee a stock market crash for SGX nor embattled Wall Street, but it is certainly a period of financial destruction if we are not careful.

At this point of time, I believe many investors are deliberating whether to sell their blue chips. The urge to cash in and take fresh positions at the bottom is very strong since the primary trend is downwards. I am equally tempted but my holdings are still intact.

To be sure, it is gut-wrenching to see some of my stocks experiencing a sizable decline, but I believe in the long term prospects of these companies, that their stock prices may rise to a peak higher than the current levels in a few years time.

I blame my steadfast belief on the lack of a crystal ball to look into the future. When will the recession hit us? What is the duration or severity of the recession? When will business conditions improve? When will the sentiment of the financial community turn around and they be emboldened again to make bulk purchases and drive prices upwards?

These are questions which I do not have a ready answer. Thus, my main concern is only that the investment be a well-managed company with strong financial reserves to tide over the bear market, while their main rivals stumble.

At the very worst, the stock may fall by 50% of its peak face value but ultimately my portfolio will improve tremendously in the next bull run. Adopting an impatient and ill-disciplined approach, there is a likelihood that I may miss out on the action for the next rally.

Many analysts had been wrong when they predicted doomsday. In fact, the darkest moment usually proved to be the beginnings of an astounding recovery for the stock market.

Back in 1990, investors were caught with their pants down. Against the backdrop of a recession, war with Iraq loomed and hot funds exited from the stock market. The US government faced huge deficits while big banks reported frightening loan losses and junk bonds were a mess. By the fall of 1990, the U.S. stock market had tumbled nearly 20 percent.

At that time, one of the most brilliant investment guru of our time, Peter Lynch (Magellan fund), bought heavily in the stock market. Here is what he has to say:

“A pretty ugly combination,” Lynch recalls. “Much uglier than the 1987 crash. Much uglier than the 1973 and 1974 bear market. Much uglier than the 1981 and 1982 recession. America was considered washed-up in 1990 — remember how we couldn’t compete with the Japanese? — and we were a hopeless country in a lot of people’s eyes. It was a very similar environment in many ways to what we’ve had in the past year. All the pessimism about the future turned out to be misguided.”

But we had a great rally in 1991. Some people had said, ‘I want to get out of the market,’ and they missed it, OK? But the people who stayed are congratulating themselves even today, saying, ‘It’s hard to stay in there, but I get rewarded by staying.’ So I certainly look upon this latest correction as an opportunity to make some money.”

Hence for those who intend to sell out, my advice is to hold onto your blue-chips instead of being in and out of a market, trying to buy back the shares at a better price during its decline.

Such an investment philosophy doesn’t apply to speculative plays though where a stop loss order is the name of the game in a bear market. What is your investment philosophy?

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Filed under Business, Economy, Stocks

3 Responses to To Sell Or Hold Blue Chips In A Bear Market?

  1. Or, do you put some cash to work and buy on these dips? I tried replying to your comment on my blog, but the email was returned.


  2. TSK

    You are really very brave in this Bear Market. If this bear market might last for 7 years before next bull run starts, you might need to wait for more than 7 years to recover your capital, hopefully and can still see some profits. Interested to see the crystal ball for the next 8 years, I’ve published my research. I still hope market will turn for the better, but cannot rely on hope. Good luck to you.

  3. @ Scott -

    If there are spare cash lying around, I do look to buy on the dips. Accumulating them when the mood is most pessimistic is the right way to invest, you just got to make sure the fundamentals of the blue-chips have not changed drastically.

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