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Wall Street is known for taking the brightest of minds and curb stomping their faces on the patio out back. In the past 3 months I've learned a lot about the dynamics of the stock market amidst one of the largest crashes we've ever seen. Especially, how accelerations in price evaluations can be expected in certain classes of stock (value vs. growth, small vs. mid. vs. large cap, dividend vs. non-dividend, developed vs. emerging, active vs. passive, credit vs. equity, time-based vs. time unlimited, high volume vs. low volume). I use comparative analytics and Monte Carlo simulation to determine the stocks I hold in my portfolio and the portfolios of my investors.

We've been in a bear market for a year now. I've been selectively bullish since Dow 11,000 --- and that turned to market bullish at Dow 8,000. That said, it could still go lower. I'm out there buying the falling knives and getting slaughtered doing it. What I didn't take into account was that when the entire market falls, it takes great companies with it. And, it takes those great companies to price levels that offer huge rewards for those patient enough to buy in at the right time.

Bear Market Considerations

Value vs. Growth

In a bear market, the growth stocks drop to value stock prices --- as if they are done growing. You see uncertainties like stocks trading below book value, sometimes cash – total liabilities valuations. The trick is realizing that this is coming and just waiting to snatch them up at these ridiculous levels.

Small, Mid, and Large Cap

The first stocks to slide are the small caps, followed like a pack of mountain trailblazers that are strapped together at the waist by Mid and Large caps. As long as you're keeping an eye out for the slide starting, you can try and unhook yourself from the pack to save yourself from peril.

Dividend vs. Non-Dividend

Cramer's been emphasizing stocks that offer secure high dividends that haven't offered yields like this in a long time, if ever. These kind of stocks do have bottom prices because there is a certain point where bond-holders sell their bonds and grab these stocks up with their historically gigantic yields. This gives dividend stocks a bottom price. There are growth stocks out there that don't have this luxury and easily drop below book values, PE ratios of 1, even if they've been growing year over year at 100%+ rates.

Developed vs. Emerging

The first to dive are the emerging market stocks. The BRIC countries have been hammered the worst. Then, you have the mountain climber effect start dropping off the developed economies. This time is historically different from any other time in history, however. Globally, leaders are stepping up efforts to curb their economies back onto the growth track within in the next year.

Active vs. Passive

Active funds are getting sacked; they're out there strong-headedly catching the raining knives. Passive funds show less of the pain. My approach to this was to get into this mess fairly diversified across industries and countries and slowly bulk up on the ones that were getting hammered the worst but still looked to have a strong future.

Credit vs. Equity

The credit market's are the market's that got us into this big mess. That said, you'd be ahead if you were in reasonable credit a year ago instead of equity. What now? If you're smart, you can catch easy safe bond yields at 8%. I would point out that I think if you're smarter, you can buy stocks and sell covered calls and pull 10% off the top. In my opinion, the smartest are buying stocks and expecting a reversion to the mean, since historically when the volatility indexes reach abnormal highs --- that's what is expected.

Time Based vs. Time Unlimited

Basically, this is the difference between stocks and options. As the market plummets, the options get comparatively more expensive. But, they still enable you to catch serious upside or downside.

High Volume vs. Low Volume

The low volume stocks get hammered the worst in times like this. There are just not as many buyers because nobody knows about them.

The Bottom Bear Market Line

In bear markets, the best strategy is to own inverse market leveraged ETFs or long puts that you bought a year ago. The hedge funds that bet that the market is manic-depressive and that the market doesn't do a good job of pricing this in have been lining their pockets with heroic gains for their investors.

What to do now?

We've already been chopped down from 14,000 to 8,000. I'm still buying predictable companies that have more upside than is priced into their stock. I'm always comparing new companies to the ones I hold in my portfolio --- maybe there are better opportunities out there? There are a lot of commentators that just comment on what the market has done and bat ideas around. There are a lot of people out there that run electronic screens to sort out stocks and then comment on the screens. There are a lot of people that achieve market returns and are happy. I believe that like in school, those that do their homework and understand how to value companies can do better.

Source: How to Succeed in a Bear Market