How to Survive (and Thrive) in a Market Downturn
Why Your Behavior Matters More Than the Market Itself
It’s easy to stay calm when markets are rising. Everyone feels smart, portfolios are green, and optimism is in the air.
But then the cycle turns. Volatility spikes. Headlines scream about recession, inflation, interest rates, or geopolitical risks. Prices drop, sometimes fast. Suddenly, investing feels uncomfortable—even painful. How you behave in these moments makes all the difference.
In the last weeks, the US indices have corrected and showed more volatility than we’ve seen in the last year of the bull run. While it was not a strong decline (the Nasdaq 100 is down 6% YTD), we’ve seen some popular individual names get decimated over bad earnings and macro-political concerns. Investors fear that this could be the turning tide and the beginning of a larger market crash.
What Happens in a Downturn?
During downturns, emotions often take the wheel. Realizing a loss hurts twice as much as realizing a gain gives us joy. Fear replaces logic and investors:
Sell great businesses at the worst possible time
Stop thinking long-term
Chase “safe” assets or speculative rebounds
Lose focus on their strategy
Buy the wrong stocks
This behavior isn’t new. It happens every cycle. And it’s why bear markets create opportunities—for those who stay disciplined.
My Approach: Focus on the Downside First
When you focus on quality businesses with strong balance sheets, predictable cash flows and durable moats, you build resilience into your portfolio before a downturn happens.
I am not chasing the hottest trend—I am doing the work, focusing on quality and valuing companies conservatively. That is why I invested primarily in European stocks in 2024, which were hated, while US stocks were loved. It’s important to understand how returns are made.
Above is an example from Amazon. I believe that Amazon will likely generate an average IRR of ~8% going forward. But we must consider the bear case here, too! How could Amazon perform in a bear case where they only grow 7% yearly? With a multiple re-rating and continued dilution we arrive at a disappointing 11% 5-year return. Doesn’t look too bad, we don’t lose money at least, but we can do better! We want a heads I win, tails I don’t lose much situation.
How to Think in a Bear Market
Here are a few simple principles I live by during downturns:
Zoom Out.
Investing is a long-term game. Corrections are part of the process. That’s why I like to focus on the intrinsic value generation of my companies: How much value is created for shareholders, ignoring the valuation multiple that impacts the short term performance of any stock.Quality First.
Companies with pricing power, strong margins, great management teams and healthy balance sheets tend to endure (and often come out stronger). These companies will acquire struggling competitors, reinvest into the business and drive efficiencies to protect long-term cash flows.Avoid Forced Selling.
Manage your risk before things get ugly. Hold cash if it helps you sleep at night. Don't invest in volatile stocks if you plan to take money out of the market within 2 years. Buy a lower-risk ETF or better: Bonds.Opportunity Over Fear.
Volatility creates opportunities to buy great businesses at better prices. Know what you own and, more importantly, know what you want to own more of!Have a Process.
Emotion is the enemy. Stick to a repeatable framework for analysis and decision-making. I use my quality score to understand better what my companies excel at and what their weaknesses are.Optimize your portfolio.
When most stocks are beaten down, we can sell our low convictions, stocks we maybe do not want to own that much, and buy more of our favorites. If all stocks are sold off, then we can take advantage of lower prices to reduce the tax burden on the sale of shares and increase our stake in our best ideas.
Want More Help Navigating Uncertainty?
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The Bottom Line
Bear markets test investors. But with the right strategy, they can also set you up for outperformance. We aren’t in a bear market yet, but many investors fear the worst. The reality is that we should always be ready for a bear market because the next one will come! By focusing on our downsides and knowing what we want to own, we can deal with it.
If you want to navigate uncertain times with clarity and discipline, I invite you to join Heavy Moat Investments Premium.
Prices will rise soon, but if you act now, you can lock in the current rate.