Lessons From A Bear Market Survivor

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Includes: AGG, BRK.A, BRK.B, CNI, D, EVRG, IVE, IVV, KO, PEP, UNP
by: Michael Hooper
Summary

Prepare for a bear market after a nine-year bull run.

Warren Buffett is our mentor on how to profit from a bear market.

Use courage, patience and dollar cost averaging to double your wealth.

I have lived through several bear markets since I began buying stocks in 1993. I stayed invested through all of them, except one. In early 2016, I got out of the market and regretted it and then got back in six weeks later.

We've seen a lot of volatility in the U.S. markets this year but little or no gains through Dec. 13, 2018. After a nine-year bull market, a bear market may be upon us. I am preparing myself for the possibility but hope I'm wrong.

Bear markets are difficult but manageable if you have patience and courage. We need the ability to grit our teeth and hang on while others panic and sell. And if we continue buying stocks, using dollar cost averaging, buying every month, we can actually come out of a bear market with 20% to 50%, or even 100% more wealth.

My best behavior as a bear market survivor was 2008-09 when I used proceeds from the sale of Wrigley stock to buy utility and railroad stocks every month from July 2008 to March 2009. My stock purchases made then, during the worst of the financial crisis, eventually tripled in value.

Our mentor for handling bear markets is Warren Buffett. He made fortunes buying stocks at 3 times earnings in the 1970s and his performance during the last bear market was extraordinary. He has been hoarding cash lately. That might lead one to believe he sees a possible downturn after one of the longest bull markets in history starting with the bottom in March of 2009.

Buffett is the master of seeing a good deal. Berkshire Hathaway (BRK.B BRK.A) bought Burlington Northern Santa Fe Railway in early 2010. Buffett paid $44 billion for the company, 18 times earnings which was a fair premium at the time. BNSF's operations are comparable to Union Pacific (UNP), which has a market cap of $107 billion.

To get through a bear market, we must have patience. If watching your stocks daily makes you negative and feel like bailing out, perhaps you shouldn't watch the numbers so closely. Especially if you own the S&P 500 in your portfolio, don't sell it. I knew a woman who sold in March of 2009, amazingly and sadly for her, at the very bottom.

I panicked and sold in early 2016 after losing 8% in 2015, but I quickly got back into the market and glad I did. I missed out on 4% portfolio gains by sitting out of the market for six weeks.

We will see some people panic again. Do not follow them. Warren Buffett does not sell his assets at the bottom of the market.

Use dollar cost averaging while buying assets. An investor may think he is buying at the bottom but the market goes lower. Buy a little more. And continue buying. Think of buying one fifth of a position at a time. This gives you five different purchases for a position. I bought into the S&P 500 12 times per year in my 401K.

Bear markets may not last long if the economy continues to grow, even at a slower pace. Right now the economy is still creating jobs. GDP was for many years around 2% and then jumped into the 3s at the beginning of the Trump administration. Stocks took off especially in 2017 and early 2018. It's possible we may not reach the market top of January 2018 for a long time.

In 2001, after the stock market crash of 2000-2001, I didn't have much money to invest. I was working all of the time at my job as a journalist in a local newspaper and taking care of my family. However I continued to invest in my 401k. I had the entire thing invested in the S&P 500 which worked out pretty good. Because I continued to buy the index every month while the market was improving. Most money managers can't beat the index so I just went with the index.

Some wise advice came from my friend George Katrouzos, of Grand Island, Neb., who traded stock options with pretty good success. I said maybe I should get into option trading, and he asked, "Is what you are doing now making you money, is it working? And I said yes and he says don't change a thing. If what you are doing is working and making you money do it all the time.

My method is an overweight position in the S&P 500 and an overweight position in Berkshire Hathaway and then some individual stocks and bonds. I underweight high-risk high-reward stocks because I don't want a single stock to ruin my portfolio. I consider Berkshire Hathaway like a mutual fund, well-diversified with a large moat and a gusher of earnings in a good economy and reliable stream of earnings in a recession.

2018 will be a record year for Berkshire Hathaway. The stock hasn't performed all that great this year but it hasn't lost money either. Eventually the mathematics will go its way, increasing earnings will drive the stock higher.

The bear market in bonds is likely over. The Fed isn't likely to raise interest rates as rapidly as it once did, although we likely will see maybe one more hike in the near term. So interest rates today will likely fall as some stock market investors look to reduce risk in equities and move into bonds. This will drive interest rates lower, and bond values will go up. This is why I'm holding onto my railroad bonds and shares in iShares Barclays Aggregate Bond Fund (AGG).

If there is a real serious downturn in the economy, the stock market may stay in bear territory for a long time. It seems to me that the time it takes for stocks to fall 10% can be a matter of a few days or weeks. But the climb back up is often months or even years.

If you don't have a five-year horizon at this point, it might be wise to reduce your equity exposure and increase your level of bonds especially short term bonds like two-year treasuries.

My portfolio is currently 17% bonds and 83% stocks. The stocks are iShares S&P 500 Index (IVV) and iShares S&P 500 Value Index (IVE), Berkshire Hathaway, utilities like Dominion Energy (D) and Evergy (EVRG), railroads Union Pacific (UNP) and Canadian National Railway (CNI) and consumer stocks PepsiCo (PEP) and Coca-Cola (KO).

Conclusion

If you are planning on being in the stock market for the next five years, brace yourself. You will likely see a bear market and a recession during a portion of that five-year period. Be patient and continue to buy stocks. GDP may slow down a bit to 2% in 2019, but long term I see a larger U.S. economy in five years and higher value in stocks that serve that economy.

Disclosure: I am/we are long BRK.B, IVV, IVE, AGG, D, EVRG, UNP, CNI, PEP, KO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.