The best kind of investor? Someone who can do the average when everyone is going crazy. Today we share an interview with Gautam Baid. It will teach you how to think and act during a bear market, writes CQ, editor of Compounding Quality.

The reason we’re writing about how to survive a bear market today? Our friend Gautam Baid is publishing his brand-new book The Making of a Value Investor. Gautam Baid and Compounding Quality had dinner in Omaha the day before the Berkshire Meeting in May 2023 and we’ve been friends ever since.

It’s great to learn from your own mistakes, but it’s even better to learn from other people’s mistakes. That’s exactly why Gautam’s book is a must-read. In his book, Gautam writes about how he experienced the last brutal bear market and how it formed him as an investor.

A person sitting at a table with a plate of food  Description automatically generatedCompounding Quality: Welcome Gautam. It’s nice to see you again. Your book The Joys of Compounding is a fantastic read and has sold more than 100,000 copies. You’ve written a second book called The Making of a Value Investor. What’s the key takeaway from this book?

Gautam Baid: The key to success in investing is long-term survival.

How to survive? Make sure that you hold tennis balls (quality stocks) and not eggs (junk stocks) when you’re in the middle of a storm.

Quality investing is the way to go. You build wealth by investing in high-quality businesses led by high-quality managers. That’s the main thing I learned from the latest bear market.

When you combine investing in quality businesses with diversification and patience, beautiful things will happen.

Compounding Quality: What’s the main difference between reading about bear markets and experiencing one?

Gautam Baid: You can read a lot about stock market crashes, but experiencing one is totally different.
The key to making money in stocks is to not get scared out of them. You must be present in the game for a very long time in order to win.

The most stupid investing mistakes are often made at the height of a bull market and the bottom of a bear market:

  1. Panic buying in a bull market
  2. Panic selling in a bear market

The key to success is to not take too much risk in a bull market and to not be too risk-averse in a bear market.

It takes a couple of cycles (bull and bear markets) before you’ll become a disciplined investor. Mentally prepare yourself for bear markets and be aware that you’ll make plenty of mistakes during your investment career.

Compounding Quality: What’s your key lesson from the latest bear market?

Gautam Baid: The latest bear market taught me two things:

  1. I should focus more on capital preservation
  2. No matter how well you prepare yourself, risk can always come from places you couldn’t even imagine

The only protection against unknown unknowns is diversification. That’s why I try to diversify my portfolio to 20-25 stocks across different industries.

Compounding Quality: Did you suffer from self-doubt during the latest bear market? And how did you handle it?

Gautam Baid: I suffered from self-doubt for sure.

“Nothing seems to be working in this market. Maybe I am really just an average investor at best. Maybe I just got lucky in the past. Maybe this is the bear market talking inside me. I am not sure.” – Gautam Baid

It’s a very normal reaction. I’d say that you just have to deal with it. You must take the short-term pain in order to get the long-term gain. Investing is all about delayed gratification.

What helped me was to not look at the stock prices of the companies I owned every single day. Instead, focus on the fundamentals and always think on the long term.

The only way you can survive a bear market is by being truly passionate about investing and stocks.

Subscribe to Compounding Quality here...