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How To Prosper From A Bear Market

Many brokers have a knee-jerk reaction to a bear market. Securities firms commissions drop, brokers paychecks fall and the layoff of back office staff begins. This insanity repeats itself because brokers have failed to look at the underlying opportunities created by bear markets. In this article we will cover four of those opportunities.

You’ve Got More Prospects than Clients in a Bear Market

The negative reaction to bear markets is created by the broker's concern of his existing clients losing money. Let's assume you have 300 clients. You probably have a 10,000 prospects. By prospects, I mean all the people in your local area that meet your criteria for a new client and could potentially do business with you. Therefore, you have many more prospects than clients. In other words, your future is potentially brighter than your present.

Those10,000 prospects are now the clients of another broker. These clients are getting less happy as a bear market progresses and are more inclined to make a change of advisers (you’re the broker in the “white hat” because you haven’t done anything wrong yet). That's very good for you. So while a bear market robs net worth from your existing clients, it creates a lot more motivated prospects that you can gain as new clients. Bear markets are an opportunity to open more new accounts than ever. In the three months following the 1987 market crash, I opened up 100 new accounts. What I did was simple.

The word “stock” became a dirty word. So I had the good sense not to prospect with stocks but rather used bonds. At that time, Safeway had bonds yielding 11.75%. I called people age 60 and over and said “Mrs. Jones, the reason I'm calling is because Safeway is offering bonds that pay 11.75%. Do you ever shop there? They would of course answer “Yes.” “Well,” I said, “you've probably given them plenty of your money over the years, how would you like to have some of theirs?” I opened 100 new accounts.

The Fallacy of Perceiving Bear Markets as Bad

Your aversion to bear markets may stem from the fact that you view gaining new clients more difficult than keeping your existing clients. That's simply a function of your false scarcity mentality. There is, in reality, no scarcity of qualified prospects. As an analogy, ask any investment banker if there was any of scarcity of money for investment in companies with no revenues and no earnings. The banker knows that money is abundant and all that’s required is a good story. Similarly, prospects and new clients are abundant and any other perception is simply inaccurate.

Because you view clients as scarce, you can create more damage to your existing book during a bear market than is necessary. All along, you’ve been telling your clients to take the long term view. If you now react to the short term fluctuations, you appear to be talking out of both sides of your mouth, you appear to have no conviction and you appear far less trustworthy in the eyes of your clients. Now more than ever you must reiterate your long term philosophy. If you don't, you are guilty of the same criticism you have about most investors and their short-term orientation.

The Opportunity to Become a Better Money Manager

Bear markets are an opportunity for self education. If you've been a momentum investor, you now get to fully understand the ramifications of that methodology. These declines give you an opportunity to see if your strategies and philosophies are appropriate in all types of markets and whether you've selected the right types of clients.

My revenue never declined from existing clients during bear periods. I had each client on a system. They either paid an annual fee or they were on a system which required annual re-balancing and the constant flow of commissions each year. Brokers whose earnings decline in bear markets have their clients on a trading system (often called the shoot-from-the hip-system) which is bad for the client and bad for the broker. Time to clean up your act.

Your Clients Are Finally Ready to Listen

If you find that your clients are oriented toward the short-term no matter what you say, try this analogy with a client: “Joe, you have grandchildren don't you?” “Have you ever babysat for them when their mother went on an errand? The child asks when will mommy be back.” You say, “in about an hour.” Then five minutes later your grandchild says, “has it been an hour yet?” That's the same way adults act with the stock market. Rather than looking at the performance of their portfolio over years, which is the appropriate time frame for stock investing, they keep looking at their portfolio day to day and even minute to minute. “Has it been an hour yet?”

If you have younger clients you simply need to teach them as follows. Ask any client that’s 40-years-old if they will be investing more money during the rest of their life than they have already invested. If they say of course, then point out that bear markets are a huge buying opportunity with stocks on sale. Therefore, market declines help them more than hurt them because the bulk of their money is yet to be invested, at bargain prices. If you have clients dollar cost averaging, show them the example below which illustrates that dollar cost averaging benefits by higher volatility (over time, dollar cost averaging accumulates more shares from a volatile market than a stable market).

Dollar Cost Averaging—Volatile Market

Investment Month Price (changes 10% from start each month) Shares Purchased
$100 January $10 10
$100 February $11 9.09
$100 March $9 11.11
$100 April $11 9.09
$100 May $9 11.11
$500 (total investment) $10 (average price for period) 50.4 (total shares accumulated)

Dollar Cost Averaging— Stable Market

Investment Month Price Shares Purchased
$100 January $10 10
$100 February $10 10
$100 March $10 10
$100 April $10 10
$100 May $10 10
$500 (total investment) $10 (average price for period) 50 (total shares accumulated)

Bear markets are a great opportunity to take in new clients, orient your accounts to more stable investment methodologies and focus your business to capture the greatest profits yet to come.


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© 2008 Financial keynote speaker—Larry Klein