In boxing, an experienced boxer with his back on the ropes knows he must not do two things if he must survive the round: One, he must never let his guard down, and two, he must not stand still; he needs to present as little of himself as possible to his opponent, so he ducks and dodges.

As investors, we now have our backs to the wall now. And as the bear has pinned our portfolios to a corner (the last two weeks have witnessed a rally though) angling to deliver the knockout punch, we can't afford to let our guard down and we definitely can't afford to do nothing or stand still (you probably have been told that's the best thing to do). While we need to act, it is important that we do the right things.  

Don't do nothing (i.e. act)
In a downturn, refusal to act is as bad as acting hastily. A thousand hearing is not worth a single seeing, so a Chinese proverb goes. You have been told, repeatedly, by the market cheerleaders (Okereke-Onyuike, Al Faki, Soludo, etc) that the Nigerian capital market is strong and immune to the global financial crisis. If you believe this or have a similar head-in-the-sand attitude as the market cheerleaders, then you had better look again, figures don't lie. Over the past seven months, the market has shed over 35% from its all-time high in March. Over the same period, the volume of trading has dipped, with daily traded volumes averaging a few hundred millions now as compared with billions traded on average before the downturn. And trading is skewed towards selling; there are more price losers with each day of trading, as investors take refuge in cash.

All this in spite of the different palliatives administered to arrest the fall. If you are resolved to ride the bear out, then you probably have invested in good quality businesses and you have a long term outlook.

The problem with this, however, is that most investors' idea of long term is usually one/two years, too short to complete an economic circle (5-10 years is the ideal). What then happens is that investors sell too quickly when prices trend upward to actually lock-in profit and hold on too long when prices fall believing in a rally, until they realize the rally would not happen and then they sell at heavy losses.

And that is why at Smart Investor, we advocate, as part of your investment strategy, that you have a stop-loss point for each stock in your portfolio. In a downturn, the first thing you do is to review and trim your portfolio to remove stocks that may take a direct hit to minimise your loss.

Don't panic
Panicking in a downturn is as grievous as sin. It is more like refusing to act to protect your portfolio. We have seen that happened over the past seven months. And the market authorities have not been helpful either, coming up with one panicky measure after another in an attempt to shore up the market. (It is not surprising that the market has failed to respond to these measures.) Before you act in a bear, you need to ask yourself questions on your investment needs, your risk tolerance level, the strength of your portfolio, and the steps you would need to take.

Having these sorted out gives you the confidence to act wisely and take full advantage of the fall.

A lot of the time we concentrate on the market price of stocks to the exclusion of its other values. For instance, First Bank and Nigerian Breweries have a consistent history (10 years) of dividend payouts; they are both good quality companies with consistent performance and growth. Based solely on price depreciation over the past seven months (First Bank has lost over 100% in price, from a high of N54+ this year to a recent price of N24+; NB 70%: N49+ high to N40+ ) some investors have sold these shares in panic. When you act in panic, it has been proved repeatedly, you often take the wrong decisions.
The NSE and the CBN have recently reversed themselves on a number of hurriedly taken decisions. You might not have that luxury. And some stocks have actually recorded gains as the market continues to fall.     

Don't be hesitant
In a bear market, (no one can actually say when a bear market will end; it could go on for months or years) there are occasional rallies, when the market looks bullish. As investors we need to know this and not be fooled by 'sucker rallies', believing that all is well again. Often after such rallies the bear hits harder. The point of this is that once you have taken a decision to exit some stocks don't let their occasional rallies fool you into staying your hand. In fact, such rallies should be a good window for you to sell and minimise your loss. In the past seven months, we have witnessed such rallies, particularly at every new measure introduction: margin accounts restructuring, 1% daily price loss, 100,000 trades for price movement, etc.   

Don't put too much faith in analysts
Olumide had the bulk of his money in a mutual fund heavy on equities. To date he has lost over 200% of his money. You wouldn't blame Olumide much, he believed, and rightly so, that a hand-picked portfolio of stocks by supposed experts should fare better in a bear market than the index that has both the good and the bad. He had too much trust in the ability of the managers and failed to act. Now he regrets that. It is never a smart thing to put all of your faith in analysts' reports and expert opinions, even in good times.

Many, like Olumide, have lost over 50% of their portfolios through that. After all, most analyses at the beginning of the year believed the bullish trend of the last three years will continue through this year. Also, market 'experts' have continued to claim nothing is wrong with our market and yet prices continue to free-fall.

Analysts and fund managers are no magicians or seers and their analyses are merely projections based on past records. Experience has shown that past performance is no guarantee of future success. So, don't rely solely on these analyses; in addition to these reports carry out your own research and then make up your mind on your sell/buy decisions when you are convinced.

Don't be over-optimistic of a quick recovery
Too much optimism about a quick recovery could make you do nothing or go on a buying binge. Most investors have seen their portfolios fall by as much as 50% since March (they probably listened to too much talk about the market being okay or put too much trust in officious and smart looking reports).

While a quick reversal of the downward trend may see them recover all or much of the loss, a prolonged bearish market could see further losses and make recovery difficult. To recover a 50% loss, an investor will need to double what is left of his portfolio, and do much more to make a gain.

Do you truly believe or can you see the stocks you have now or are buying gaining that much in the short to medium term, even in a recovery? Do your calculations well and you would see that this is near impossible, if you factor in inflation, falling government earnings due to falling oil prices and the exposure of our banks, the major drivers of the capital market, to the global financial crisis.

Don't be unusually pessimistic either
Some novice investors who got badly burnt by the current downturn have vowed never to invest in the capital market. Their sentiment is understandable, though a bit absurd (the fact that someone gets drowned does not prevent others from swimming). Some of these investors were lured into the market by promises of quick gains; they never fully understood market dynamics. While nobody can say with certainty when the market will recover it is certain it will.

And even in falling markets some stocks are still bullish (see our edition 15 for an article on stocks that have remained bullish despite the downturn).

The downturn could end tomorrow, next week, next month, next year, or several more years to come; nobody knows for sure. Knowing this will give you a better perspective on the market and help you take the right steps. The watchword here is: 'look before you leap', if you must leap.