In the midst of a bear market, there are eight secrets that will pave the way to bear market profits:
The first bad news is never the last, as so many investors found out when the Internet bubble imploded in 2000 and quickly eradicated $14 trillion of wealth. If the fundamentals don’t match up with the stock’s price, don’t buy it.
A good example of this is what happened to Qualcomm during the Internet bubble disaster. You were a happy camper if you caught the ride from March 1999 when QCOM was just under $8 to December 1999 when it hit $88. However the fundamentals started to breakdown in January 2000 and kept going until August 2002 when it hit a low of $13.75. That was a long and painful two years for many people.
Don’t Overpay
One of the biggest miscues bear market investors make is concluding that certain stocks are bargains simply because they’ve traded down to historic lows. It’s better to consider “tangible book value.”
The reason: Tangible book value represents what a shareholder can actually expect to receive if a company starts going bad it’s a good measure of what the firm’s real assets are worth.
At a time when earnings are decelerating or have vanished completely, buying companies that are trading below tangible book value can provide an extra measure of downside protection. Especially when you’re talking about a company that’s perfectly positioned to capitalize on powerful global trends.
Look for Companies with Pricing Power
When the going gets tough, the tough stop buying.
At least, they stop buying the stuff they want, and shift, instead, to the stuff they need. This has a major ripple effect in the economy.
Many businesses are forced to go on the offensive to keep the customers they have — or to “win” new ones — at a time when consumers are loath to spend. This suggests that companies that are able to continue, or even ramp up, their advertising spending make the best bets. Especially alluring are companies that can keep their customers — and even raise prices.
Watch for the ‘New Research Coverage Initiated’ Signal
Although Wall Street hates to admit it, analyst ratings and recommendations aren’t intended for individual investors. At least, that’s been the case historically. Investment banks actually use their company “coverage” to generate investment banking deals and to cozy up to the executives of the firms that are being “analyzed.”
Because analysts often have access to insiders long before they publish their “reports,” new coverage can signal positive future growth or expansion plans.
Digging for Dividends
Many investors focus on so-called “growth stocks” in their rush for riches, when study after study demonstrates that dividend-yielding stocks can offer as much as a 25-to-1 advantage.
One study by Ned Davis Research notes that dividend-paying stocks provided returns of more than 10% annually from 1972 to 2005. In contrast, non-dividend-paying stocks posted gains of just 4.1%.
Given that this research study started at the worst possible time in the past 40 years — just prior to the “bear market” of 1973-’74, which dragged on for 21 months and caused shares to lose 48.2% of their value — these numbers are especially noteworthy.
Follow this playbook, and you won’t have to remain a spectator during lousy markets. You’ll be out on the playing field — and you’ll beat the bear.
It’s Always Darkest Before the Dawn
Here’s the ultimate irony: Bear market investing offers a direct pathway to the biggest profit opportunities an individual investor might ever see.
History shows time and again that the worst returns come to those who buy at — or even near — market peaks, like those of 1928, 1969, 1999 and 2007, when price-to-earnings (P/E) ratios are typically higher than “normal.”
Conversely, investors who buy when the days are darkest reap the best returns: Think 1932, 1942, 1982, 2003 and — take a deep breath — possibly 2008.
You Can’t Afford to Sit on the Sidelines
Clearly, at a point when it looks like the world is going to hell in a handbasket, sitting on the sidelines in cash would appear to be the safest strategy. But the one major problem with that strategy is the “safety” you feel is an illusion. And the strategy doesn’t work.
Here’s why. You see, you can’t score if you don’t play. And if your bear market investing strategy is to sit on the sidelines during volatile stretches, the odds are good that you’ll end up as a mere spectator when stock prices rebound — meaning, you’ll miss out on the big updraft that generates the long-term profits we seek.
Follow the ‘Smart Money’
The so-called “smart money” understands that many investors panic and race for the exits during bear markets. The shrewdest investors position themselves for the next round of profits both on the long side through stock or call option buying — even though those profits may not appear for some time — and on the short side through put buying, which can pay off sooner with markets in turmoil.
That’s why it’s best to stick with a long-term, battle-proven strategy.This approach to bear market investing enables you to stay invested alongside the smart-money crowd by keeping some skin in the game at all times.
