Bull Markets Rise, Bear Markets Fall: Here’s How I Use Each to Build Wealth

You can make money in any stock market. Luckily, you only have to prepare for bullish and bearish markets. While each market has different catalysts that determine the bullishness or bearishness of the current trend, knowing how to navigate these markets can open the doors to higher returns.

I optimize my portfolio and investment decisions to increase the probability of making money. It’s not a guarantee, but having a game plan for each market type is better than being unprepared. Here’s how I navigate bull and bear markets.

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Prioritize fundamentals

I like Warren Buffett’s mentality of buying and holding companies for multiple years rather than buying shares and then strategically exiting after an earnings report. Those moves sound flashy when they work, but they can also backfire. Even if you win those types of trades, you incur short-term capital gains, which are taxed less favorably than long-term capital gains.

Knowing what a company does, which catalysts will influence its stock price, and what it did in its recent earnings is vital before making any investment. You need this information to outperform the S&P 500 in both bearish and bullish markets.

The fundamentals differ for each company, but there are a few common metrics to monitor. Revenue and net income growth rates are two of the most important data points from an earnings report. They indicate if a company is gaining market share, and guidance indicates where the company is heading next.

I also like to look at valuations, giving preference to growth-oriented metrics like forward P/E ratios and PEG ratios. The problem with the P/E ratio is that it doesn’t factor in growth, which is why a bank stock may look like a better deal than a fast-growing tech stock on the surface.

Following multiple companies makes it easier to find undervalued picks in bull markets

During a bull market, most assets gain value. This is a good time for investors who have been accumulating shares of various companies and funds. However, you may have some extra cash on the sidelines, and not everyone likes the idea of it sitting idle while inflation eats away at its purchasing power.

The best way around this is to monitor multiple companies and funds. Even in a bull market, some growth stocks will lose value. A bad earnings report may be enough to send a high-flying growth stock down by more than 10%. If you like the company’s long-term fundamentals, that drop may present a good buying opportunity.

I’m not the type of investor who looks to short companies at the top or buy puts to maximize returns in anticipation of a correction. Those strategies are extremely risky and can lead to substantial losses. The more stocks you monitor, the easier it is to find a stock that hasn’t rallied as much as it should have, even in a bull market.

Bear markets create discounts

Although bull markets offer opportunities, you can make even more money in bear markets. Many people panic and sell their investments after multiple weeks of losses. Some people are forced to sell their positions due to margin calls.

Margin has become more popular in recent years, and it can accelerate downturns. One of the biggest recent examples of margin calls moving the stock market was when Leopold Aschenbrenner’s Situation Awareness hedge fund had to liquidate all of its positions due to a margin call. The days leading up to the big margin call spooked many AI stock investors, but those same stocks recovered dramatically after the margin unwind had concluded.

If you know a company’s fundamentals, you won’t be bothered if it is down by 10% or 20%. I only buy a stock if I like where it is heading within the next five years. Short-term noise and volatility do not change long-term fundamentals. This mentality can help you hold assets during bear markets and build your positions while others are rushing for the exits.