Bull Markets Make You Money, but Bear Markets Make You Rich

The current market downturn might just be an opportunity.

Photo by Diego PH on Unsplash

Human nature is a funny thing. During bull markets, it’s endless euphoria, good money, and some questionable lines of thinking. It could be Tesla sitting at 1000x earnings and all-time highs with some guy on Reddit quoting Warren Buffet to “Be Greedy when others are Fearful” despite Tesla being at all-time highs (implying the fear is the stock is ‘overvalued’.

However, when times are actually looking rough, suddenly it’s the end of the world. Sure, times are DEFINITELY tough right now, but this is the time when you start making moves. For startups, this can be a great time to attract top talent and acquire customers from large companies that have cut advertising. For investors, this can be a way to pick up cheap shares in down rounds and find some larger public companies that are ripe for a strong rebound. Some companies will go out of business, some will come back but never meet their pre-recession peaks, and some will come roaring back to all-time highs. Either way, there’s plenty of money to not only be made on the way down, but if you can make money on the way up with those gains, it can be life-changing. For example, let's say Netflix turns its business around. It’s down over 90% from highs, and realistically, it’s probably not going anywhere. It may or may not go back to all-time highs, but if you can predict that it will, on stock alone, you could make nearly 400%. Not to mention the absurd money you could make from a good options play or otherwise.

When everyone is slowing down, losing progress, and using the recession as an excuse not to grow, that’s when it’s time to capitalize on these opportunities and surpass the old leaders.

What Should You Do?

I don’t see this getting any better, any time soon. So, the good news is you likely have time. The Covid recession was a fluke, but most recessions and downturns last about 11 months or so. We are arguably a couple of months into this one, so you have a good amount of time to make a plan, and execute it. So, right now, the main two things to do are:

Research

Find companies that are likely to rebound to all-time highs, or make a strong comeback at the very least. It might take some groundwork, or maybe you already know. Think of the world as it is post-recession. Are things going back to normal, or will there be a new trend? What are the winners and losers? Are there any companies that had a reasonable valuation before, trending upwards, but are now down due to the recession? What things are you using more now than you were before?

It might be a normal analysis of the state of the world, or maybe it’s time to deep dive into some earnings reports. However you do it, you NEED a plan. Just because it was big during a massive bull run, doesn’t mean it’s going to make a comeback.

Accumulate money & Increase your earnings

Right now, Medium is my main source of ‘side income’ and I try to re-invest all of the money I make from it (It’s not too much, but it’s slowly growing). However, I am constantly branching out into potential new ways to make more money because money is time and freedom. However you might go about doing it, it’s always good to start building ways to increase earnings and passive income. Obviously, writing isn’t a “passive” income, but the following I have built doing so does help when branching out, and as I grow, there’s lots more money to be made. Once one becomes established, I usually try to branch out slightly into something else and see what works. I have tried several over the years with varying success, but Medium has definitely been one of my most successful. Whatever your thing is, keep trying and start building some income streams to have money ready. Whether it’s to survive the recession or to up investments at discount prices.

Capturing Value

In general, it’s unlikely you will be able to time the market. Things change so rapidly and realistically, none of it actually makes sense. This means if you were to do something like take 100% of your money and buy when you think it’s the bottom, it could very well drop another 10–20% and now you’re down a lot and didn’t capture nearly as much value as you should have. The most common strategy is ‘dollar cost averaging’ which takes a few forms.

The first, and simplest, is simply periodic investments put into stocks on a regular basis. If you get a monthly paycheck, every month, put a specific amount into the stock. This will create a good average on the way down so that you don’t put too much at any one time and get hosed.

Another is, for example, if you have $10,000, take the first $1000 and buy when you think it’s a good entry price. After that, basically, anytime it pulls back, invest another $1000. This ensures you can capture any value on the way down, and lower your average. For example, let’s take a look at Netflix stock:

If you saw Netflix pull back around the initial $400 mark and thought it’d be a good time to buy, you’d be down over 50%. If you bought the first $1000 at the $400 mark, then another a month later at the $360, then more at the $200, then $170, and so on, your average is now below $300 as compared to $400. If you invest all $8,000 after the second dip below $200, then your average will be roughly $200 or below and ready to capture the majority of the value if it goes back up to $700. The downside to this is if it doesn’t ever pull back, then you are left with a $1000 investment.

However you go about it, the general idea is don’t invest the entire amount at one entry point. Gauge the market and invest over time for the best price.

Make Money on the Way Down

Another big part of this is the ability to make money on the way down. The best ways to do this are likely selling calls or buying puts. Shorts are risky because it opens you up to unlimited liability, but some long-dated puts could capture value over time quite well. As well, if you have began DCA’ing, once you own 100 shares of a company, you can sell calls and then reinvest the premium on the stock. Selling calls is a great way to hold stock through a ‘flat’ or down period without having to sell your stock, and even accumulate more shares.

Growing Your Business & Personal Brand

Obviously, every business is different and each has its own issues to take over. Some companies, especially those that are reliant on logistics, crypto, or most physical products might struggle right now. However, according to Harvard Business Review, On average, increases in marketing spending during a recession have boosted financial performance throughout the year following the recession. This is because when times are good, everyone can afford to advertise. It’s not only WAY more companies advertising, and you’re fighting for people’s attention, but it’s also way more expensive. During a recession, advertising is cheaper, and the channels are more open. This means there’s less competition, you can attract higher-quality talent from companies like Crypto.com and Tesla following their current layoffs.

I know this seems counter-productive, but don’t stop marketing, but it’s still important to manage costs. This is business-specific and it’s hard to say specifics, but if executive salaries are out of hand, then if it’s feasible, cutting salaries, expensive trips, etc might be a good idea. Make a plan to make sure money lasts. If possible, raise as much as you can as quick as you can before things get too bad and all the money is gone.

Lastly, capitalize on fire sales and down rounds. Fire sales are when a hot startup ends up running out of money, and now you can potentially acquire a hot startup for pennies on the dollar. This could be valuable for IP portfolios, assets, talent, or otherwise. Down rounds are similar, except it’s just a cheaper valuation but the company is still in business (this can be for anyone though.)

Take-Aways

If nothing else, don’t just chalk up the recession as a reason to not grow. When everyone else is slowing down, it’s time to make a plan to grow, and everyone can use this as an opportunity to grow and surpass those that were on top but now slowing down. Anyone can capitalize on this too, whether it’s everyday people investing, or businesses capitalizing on billion-dollar companies slowing down hiring, advertising, and growth.