Five Tactics to Beat a Bear Market

The Dow Jones Industrial Average is already in the bear’s grasp. And the U.S. economy may well be headed for a recession. But here’s the ultimate irony: Bear-market investing offers a direct pathway to the biggest profit opportunities most investors will 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/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.

Clearly, at a point when the world looks like it’s going to hell in a hand basket, sitting on the sidelines in cash would appear to be the easiest and safest strategy to adopt. But there’s one major problem with that kind bear-market investing strategy.

That “safety” is an illusion. And the strategy doesn’t work.

Here’s why.

Spectators Are a Bear Market’s Biggest Losers

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.

The so-called “smart money” understands that many investors panic and race for the exits during bear markets. The shrewdest investors already are positioning themselves for the next round of stock-market profits - even though those profits may not appear for some time.

That’s why it’s best to stick with a long-term, battle-proven strategy - like the one that we advocate here at Money Morning, as well as within the pages of our premium monthly newsletter, The Money Map Report. This approach to bear-market investing enables you to stay invested alongside the smart-money crowd. That’s really not a surprise, given that they’re concentrating on the same investments that we’re outlining for you - including companies that focus on such key global plays as energy, natural resources and worldwide infrastructure.

Not only are many of these “Global Titans” increasing earnings despite miserable market conditions, they’re actually building market share and focusing on powerful trends that will take decades to play out and that will generate trillions of dollars in profits along the way.

After all, the global markets truly reward the companies that make the world “go ‘round’.”

The Five Keys to Bear Market Profits

Now that we’re in the midst of a new bear market, here are the five secrets that will pave the way to bear-market profits:

1. Don’t Try to Catch a Falling Knife: The first bad news is never the last, as so many investors found out when the Internet bubble imploded in 2000, quickly eradicating $14 trillion of wealth. If the fundamentals don’t match up with the stock’s price, don’t buy.
2. Don’t Overpay: One of the biggest miscues bear-market investors make is in concluding that certain stocks are a bargain 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 turns turtle; it’s a good measure of what the firm’s real assets are worth. So, 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.
3. Look For 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 loathe 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 - in the face of a bear market.
4. Watch for the “New Research Coverage Initiated” Signal: Although Wall Street hates to admit it, analyst ratings and recommendations aren’t intended for us 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 senior executives of the firms that are being “analyzed.” Since analysts often have access to insiders long before they publish their “reports,” new coverage can signal positive future growth or expansion plans.
5. Drill 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 25-1 advantage. One study by Ned Davis Research is particularly telling, noting that dividend-paying stocks provided returns of more than 10% a year from 1972 to 2005. Non-dividend paying stocks, in contrast, 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 1973-1974, 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.

Comments

[simonnull]

i have been trading only a short time, bing a farmer for over 54 years i found it very eazy to sell option puts, sence that has been m stily all my life. m port was up 29989.00 yesterday and up 127800,for 5 days of trading. the potions want to sell this country out over the last 49 years, sobe it.

[ArtfulDodger]

Mr. Fitz-gerald:

In an economy that is clearly in a state of stagflation, how do you invest?

History shows us that a stagflated economy is the toughest to invest in.

Only when the inflaters stop inflating is there anywhere decent to invest. And that has not come, yet.

Your comment, please?

[hanson001]

I don't understand what you just relayed simonnull, but no doubt, you are a genius.

[bhakta]

I agree with the DIVIDEND point in particular. I like the Canadian energy trusts.

[JohnPseudonym]

I never buy at the bottom or sell at the top.

I buy 20% off the bottom and 20% before the top (Or try to anyway).

Consistent, solid returns are what I'm after and riding the trends is the best way to go.

Greed will bring you great riches and then take it away all in a flash.

[theinvestingspeculator]

I know a lot of trades who made money 2000-2002. The best place to invest is a counrty in a bear market with better growth than the US--------China

[blink0404]

Seems like bad advice to give the 'best tactics to beat a bear market' to individual investors. individual investors do not have to invest right now and probably shouldn't until we start to see signs of recovery and a stronger dollar. mutual funds must keep going right now; individuals can wait it out with cash as a strong option.

in my opinion, here's a better piece about what to do in this market. It's a podcast by james revshark depore with some pretty sound, commonsensical advice
check it out if you really want to make it through this market without too much pain: www.greenfaucet.com/sh...

[Ravo]

Tangible book value is an illusionary measure as far as stocks are concerned, because on liquidation, the company's assets go to bondholders, bank debt, etc., and the shareholder is last in line...

[FundamentallySound]

blink0404, sitting on the sidelines with some cash is a smart decision, however when the market is bottoming out like it is, investors need to take advantage of the low levels and perhaps buy into the S&P500.

Ravo, I agree with you that the tangible book value is not a solid measure since we are shareholders will probably see none of that after liquidation

[User 26737]

santosh ....... how do you support your theory "when the market is bottoming out like it is" ........ where have we bottomed?? when will we bottom??

[Dan Walker]

Don't forget rule number one: "Don't try to catch a falling knife.". Come back late next year with this advice. Problem is, no one will want to believe you then. When they should.

[FundamentallySound]

I should reword my thoughts, we have not bottomed, I do not know where we will. As the market is declining like this, great values are being revealed especially in IT where solid companies are trading around historic lows. Just a thought to keep in mind for the interested.

[Did U ThinkThe PonziSchemeWould Last?]

Folks, forget any long position in the market until we get a capitulative collapse of the Dow. Sorry, Dow 11k is still a bubble. This was the greatest bubble of all time and it will be the greatest bust of all time. Buy puts. Go for the way out of the money leaps. That farmer dude who first commented is selling them. OK OK I know that was no farmer but was just a manipulation intended to draw "the stupid people" into selling puts for fun and profits. All the intentional spelling errors, etc. are a dead giveaway. Mr. Market, we see you. We know your face. You can't fool us anymore. You add no value to society. The decades of FIRE are over. Good Riddence.