How to Trade a Bear Market

Baruch at Ultimi Barbarorum gives us his tips on how to trade a bear market:

Let the Constanza Doctrine be your guide: do The Opposite of what feels good. You are not alone, and at the moments of maximum stress when you think they’ll never, ever go up again, everyone else will be thinking the same thing. Take your hedges off because that’s when we are about to go up. Similarly, watch out for when you feel really positive about the market. When you think everything is going to be all right for a while, add those puts back. This of course will drive you mad, and if you are successful you will eventually stop being able to recognise what it is you actually think about things, at which point you will no longer know what The Opposite is. I am there already.

Baruch is hopeful that the bear market will come to an end in three to six months, at which point he can go back to simply buying stocks he thinks are going up. So the key, it seems, is to know when you’re in a bear market and when you’re not. If you are in a bear market, then feeling good about something is a bad sign; if you’re not in a bear market, then feeling good about something is a good sign.

Baruch tells me that I will "suffer appropriately" for being invested in index funds. Frankly, the suffering involved by being in index funds seems small compared to the suffering involved in perpetually second-guessing oneself.

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