Deal Report is not a market timing service. We don’t know what the stock market is going to look like in 3 months or a year. But we know a bad day when we see one, and today was a bad day.

We are optimists and we believe that eventually, markets will resume the long-term upward trend it has been on for nearly a century.

Investing in a bear market is difficult emotionally even if you share our optimism that good companies will win out over the long term. It can be draining to buy a stock and see it decrease in value. Bear markets can also be bad news for some private investments because the IPO market tends to dry up.

On a day when the NASDAQ is down more than five percent, here are three moves that can help you continue to invest for the future when the public markets are in chaos.

Consider Buying Disruption

One strategy for investing in bear markets is to buy the companies that will disrupt their industries or create entirely new industries. Economic stress is a great time for such companies to make their mark. Companies like Uber and Slack were founded during the great recession of 2008, but the trend goes back much further than that. Microsoft was founded in the recession of the 1970s. Hewlett Packard, Disney, and United Technologies all started during the Great Depression.

Great companies are founded in good times, too. However, in bear markets, there are fewer investors willing to make the commitment. Imagine looking at an early investment in Hewlett Packard after 10 years of the Great Depression, with World War II underway. Would you have been able to invest? 

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Important

Disclosure! These arenot official recommendations. Investing is risky. Before making anyinvestments, we strongly advise you to discuss your investment options withyour financial advisor, including whether any investment is suitable for your specific financial circumstances and needs.

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Consider Buying very early

An alternative strategy d is to invest in companies very early in their development. The earlier in a company’s history you invest, the higher the risk and the higher the potential returns. During a bear market, investors wait out the market while the company works towards  achieving its goals. Imagine investing in a drug company during a bear market. If you invest when its clinical trials are nearly over, you may be hoping for a fast exit event such as an IPO. If instead, you invest at an early stage such as during pre-clinical trials, you do so knowing that it will likely be some time before IPO investors are ready to invest. During that time, the bear market may come to an end, making an IPO more likely to succeed. As you see in the chart above, IPO activity has only dipped below 200 IPOs per year for three full years once in the last two decades. Based on that historical trend, now may be a good time to consider buying into a company you don’t envision being ready to tap into the public markets for more than two years.

Consider Buying for Acquisition

A final strategy to consider is buying into a company you do not think will go public at all!  Not every company is destined to go public, and many should not. In those cases, as an investor you should be looking to an acquisition as the eventual exit opportunity.  Look for companies in consolidating industries that could bring real value to a potential acquirer. In all cases, the company should be a good investment on its own merits, since any potential buyer will also be looking at the future cash flows that the target company can generate. But if the company looks like a good investment to you and is also in an area with plentiful acquisition activity, that company could  be a better investment opportunity than a company that is in an area without such merger activity.

Your Checklist Items: Rather than being turned off by bear markets, look to them as an opportunity to diversify into private companies. There you are shielded from the day-to-day gyrations of the stock market. As we’ve written in the past, you should be prepared to support these companies through multiple rounds of fundraising if they are meeting your expectations.

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