Navigating the bear market

We have been doing this long enough to know one thing with certainty: bear markets do not destroy portfolios. Investors destroy their own portfolios during bear markets. The market simply creates the conditions. The damage is self-inflicted.

Those who have been reading us for a while know that we have been 100% invested in equities for many years now. We have lived through the pain of the last 18 months the same way we lived through the pain of prior cycles. This is not new territory for us. Every cycle we have invested through since 2011 has had its own version of what we are witnessing today: the headlines change, the triggers change, the narratives change, but the emotional experience of a drawdown is same. That is actually the reason we find it worth writing about. The specifics of each bear market are different, but the behavioral patterns that get investors into trouble are always the same.

And before anyone assumes this is a piece aimed at retail investors, let us be clear: everything that follows applies equally to professional fund managers. Perhaps even more so. A retail investor dealing with a 30% drawdown is battling their own emotions. A professional fund manager dealing with the same drawdown is battling their own emotions plus career risk, redemption pressure, LP anxiety, peer comparison, and so on. We know this because we have experienced it ourselves for 9 years.

These are what the industry calls non-performance risks, and they are brutally powerful motivators. They push even the most rational, process-driven managers to do things they know are harmful: cutting positions to reduce reported volatility, rotating to “safer” names to look defensible in investor letters, or sitting on cash when they should be deploying it aggressively. The professional fund manager has better tools, better information, and better training. But at the end of the day, they are human. The same phycology, loss aversion, social proof pressures. Just being a professional fund manager does not come with immunity from behavioral biases.

What follows is the set of internal protocols we have developed at Nine One Capital to make sure we do not become our own worst enemy when the screens turn red and stay there for a long time. Some of what we do will feel counterintuitive. That is precisely the point.

During bear markets, media coverage shifts overwhelmingly negative. This is not a conspiracy, it is economics. Fear generates more clicks than optimism. Further during the bear market, we notice the negative news more.

What we have observed in ourselves, and what the research confirms, is that this constant negative intake works on us subconsciously through what psychologists call the availability heuristic: we judge the probability of events based on how easily examples come to mind. When we have spent the morning reading about tariff wars, tension in Middle East, Crude Oil supply risks etc, every decision we make gets influenced by those narratives, even for stocks that have nothing to do with them.

For our portfolio and watchlist stocks, we have built an AI-driven notification system in-house that tracks the specific variables about demand signals, capacity data, regulatory changes, key raw material price movements etc. This helps us to stay informed but not bombarded with all kinds of negative news.

When a stock we own drops 15% in a day on no company-specific news, our instinct, like anyone else’s, is to interpret price as information. “It is down sharply, therefore something must be wrong.” Behavioral scientists call this outcome bias: judging a decision by its outcome rather than by the process behind it.

This is why we write down our investment thesis before buying or selling any stock. The investment thesis could just be a couple of paragraphs to full fledged report and excel. When the stock falls sharply, we go back and read this. We do this from the actual written document, not from memory, because memory under stress is unreliable. Was the thesis about a cyclical trough with a 2-3 year recovery trajectory? Has that changed because the Nifty fell 4% today? Almost always, the answer is no.

The written thesis also gives us a reference point for comparing risk-reward across our portfolio and watchlist, which feeds directly into the switching decision discussed in Point 4. We encourage our readers to start writing their thesis before committing any buy or sell.

What we have noticed in ourselves, and in managements too, is that during bull markets we revise our bull case upward, and during bear markets we revise our bear case downward. Revenue growth of 8% suddenly feels too optimistic, so we start modeling for flat. What feels like conservatism is actually recency bias in disguise: we are projecting the current environment indefinitely into the future, the exact same mistake we make during bull markets, just in the opposite direction.

Our practice is to leave the assumptions we made when we first built the thesis unchanged unless there is a genuine, company-specific, fundamental change. A broad market decline of 25% is not a fundamental change in demand for fasteners or hotel room nights. We stick with the original forecast. This discipline is what allows us to hold conviction and add during drawdowns.

We have found that we usually know which stocks in our portfolio are mistakes well before the bear market starts. We are often holding them because they are down 15% and we are waiting to exit at breakeven. This is the disposition effect: investors hold losers too long and sell winners too early because realizing a loss forces us to confront that we were wrong.

Bear markets make this worse because that stock is now down 40%. But genuinely good businesses on our watchlist are also down, finally at attractive entry points. What we try to do at this stage is stop waiting for our mistakes to come back to breakeven and instead actively scout for switching opportunities. If we were not convinced about a position before the market fell, a lower price does not make it a better investment. It makes it a cheaper bad investment.

We check individual stock prices daily to assess theses and identify opportunities. But we consciously avoid checking the aggregate portfolio value during sharp drawdowns.

The reason is loss aversion. Studies show that humans feel the pain of a loss roughly 2 to 2.5 times more intensely than the pleasure of an equivalent gain. Watching a portfolio drop from Rs 5 crore to Rs 3.8 crore triggers what neuroscientists call a behavioral hijack: the fear center takes over, rational analysis gets sidelined, and the overwhelming urge is to stop the pain by selling. By tracking individual stocks without aggregating them, we keep the analytical clarity we need while avoiding the emotional trigger that leads to bad decision making.

Gold is up 15% while equities are down 25%, so the instinctive pull is to own more gold. This is hindsight bias meeting recency bias. Allocation to equities, and specifically to small and microcaps, should be decided with a long-term framework that already accounted for periodic 30-40% drawdowns. The current pain does not invalidate that framework and we encourage our clients who opted a particular part of their portfolio towards small and micro caps to continue deploying rather than changing it, which brings us to the next point.

We will never buy at the absolute bottom. We will never sell at the absolute top. Nobody does. The pursuit of the perfect entry is perfectionism disguised as prudence, and it paralyzes action. For full transparency, we personally do not hold cash as a tactical position, we stay fully invested. But for those who do hold cash, this is the moment to act, not to wait for comfort.

Markets transfer wealth from the impatient to the patient. Selling at the bottom feels prudent and comfortable. Buying during panic feels reckless. Holding through a 35% drawdown feels like denial. Every one of those feelings is wrong.

The crowd, by definition, earns the average return. To earn above-average returns, we have to do things the crowd is not willing to do. The discomfort we feel when buying into a falling market is not a warning that we are making a mistake. It is evidence that we are doing something most people cannot bring themselves to do. It is only when our actions are different from the average, is when we can expect the outcome to be different from the average.

Bear markets are not fun. Watching years of compounding get compressed into weeks of drawdowns tests temperament in ways no amount of intellectual preparation can fully cushion.

But here is what we have learned from those cycles: the investors who emerge strongest are not the ones with the best macro calls. They are the ones who managed their own psychology. They had a process and they stuck to it.

Every great vintage of returns in Indian equities was born in a period that felt like the world was ending. 2009, 2013, 2016, 2020. Go back and read the headlines from those periods. They will feel similar to what we are reading today. And yet, investors who deployed capital during those windows, in quality businesses at trough valuations, generated returns that changed the trajectory of their wealth.

At Nine One Capital, managing this behavioral dimension is core to what we do for our clients. During these trying times, we communicated the importance of staying invested, added more stocks to our recommendation list, and gave clients assurance on the companies we have recommended. Ultimately, the goal at Nine One Capital is to help clients make money, not simply to recommend stocks that go up.

If you would like to understand our research process in more depth or explore how our advisory services can support your investment journey, you can reach us at gaurav.a@nineonecapital.in or fill in the form here (link).