Strange as it may sound, it is very difficult to outperform a bull market and investors who have gone through multiple bull and bear cycles would concur. Before coming to reasons why this is so, it is perhaps more relevant to understand why bear or sideways markets are easier to outperform.
In Bear markets, savvy investors can increase allocation to defensive sectors like FMCG, Pharma, IT etc while Indices shackled by their fixed list of stocks can see themselves helplessly going down with them. Also, there is always a Bull phase going in some dark unseen corner of the market while rest of the stocks are collapsing. An experienced investor knows this and can make good use of it. There are many more darts in the wizened player’s pockets like increasing cash component in the portfolio, better emotional control etc which help in outperforming a bear market. This is not to say that his portfolio doesn’t fall. It is just that it tends to fall lesser than the Indices.
Sideways markets are even more fun. With the broader market not going anywhere, most investors lose interest. Movement stops, volume drops, silence reigns and this is precisely the time when the hum of the sap moving up the trunk and filling the fruit with juice becomes audible to the trained ear. Another good thing is that there is no rush to pick the fruit because nobody knows it has ripened. The patient investor can unhurriedly do all the research he wants and keep filling his basket without being jostled and outbid.
Bull markets, paradoxically, are stressful times for rational investors. One major reason is valuations not making sense. A huge tide of hot money comes in and bids stocks to levels which make no investment sense to a seasoned investor. He might like the prospects of a stock/industry but he feels helpless looking at the valuations. At times, he would actually be selling them due their euphoric levels and regretfully see them doubling, tripling in a few days. Another reason is that a good investor doesn’t like to be hurried, he wants to take his time to decide. But in a Bull market he blinks an eye to look at the fundamentals and when he looks up, the opportunity is already 20-30% higher than the level he thought of entering at. In a nutshell, he is paralyzed, valuations won’t let him buy and momentum either won’t let him sell or sell too early.
However, redemption comes. A time comes when skill and experience gain victory over luck and foolishness. And this is generally how it works. At extreme high and low levels of markets, donkeys and horses trade at same valuations which is a roundabout way of saying that fantastic and lousy companies trade at similarly exorbitant or melancholic multiples. Now is the moment to strike and strike he does. He sees fake gold and real gold fetching the same prices and he switches them. Sure enough, when sanity returns, the wise old man is a lot richer and the foolish inexperienced guy is hopefully wiser.