Sunday Musings: Profiting In A Bear Market

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Not losing your shirt in a bear market, so that you will be around for another bullish period, is on of the most important lessons most investors will have (hopefully) learned once this bear has run its course.

Al Thomas, author of “If it doesn’t go up, don’t buy it,” wrote another timeless piece on the subject titled “How to profit in a bear market.” Have a look:

Hope you didn’t lose any money in the market this year.

Maybe you haven’t noticed we are in a bear market.

I’m sure your broker hasn’t mentioned it – or even called. Brokers don’t like to talk to their customers when the market is going down. If you happen to call him he will fall back on the tried and true loser, dollar cost averaging.

“Don’t worry, Mr. Dumbnik, the market always comes back.” Notice he didn’t say when, but did add this is a great buying opportunity and you should be dollar cost averaging. Then when the market goes up you will have a bigger profit. And pigs can fly.

Dollar cost averaging is very good, but the only time to do it is when the market is going up. Yes, up. And then follow it along with a stop loss order to lock in the profit. Dollar cost averaging down is about as smart as one of those flying pigs.

My bet is your broker never heard of a reverse profit. Forget him. It is pretty obvious he did not have an exit strategy.

Here is the big secret of the stock market that Wall Street does not want you to know. Smart investing is not buying. Smart investing is selling. Unless the investor has an exit strategy for every position in his portfolio he will never make money in the stock market. Don’t have the strong equities carry the weak ones. Few brokers have exit strategies. Without one you will be broker, not him.

Just imagine you pull a number out of the air and say you will limit any loss in a position to 10%. Some say that is too much. You have to decide how much you are willing to lose just in case the one you pick goes down instead of up.

Forget about value. There is no “value” in a runaway bear market. All stocks are overpriced. That is where we are now.

How can an investor profit when the market is tanking? Very simple. By NOT being in the market. We have seen a 40% break and more for many stocks. GE broke from 40 to 18 – so much for that “good” company. U.S. Steel, 170 to 35; General Motors, 39 to 5; Caterpillar, 80 to 33. And how many more can you name?

Let me repeat. Unless you learn how to sell you will NEVER make money in the stock market.

If the investor could get back the difference from today’s price to that 10% down spot he would consider it a profit. That’s your way to make money in a bear market. Don’t lose money.

The one who loses the least in a bear market is the winner. The money he did not lose is really a profit.

[emphasis added]

Amen. I couldn’t have said it any better. In case you don’t know, losers, according to the emails I have received, are everywhere. Whether you received portfolio advice from a bank’s investment department or money managers who are handling billions of dollars in clients’ assets, the result has been the same: Everyone has lost some 40% – 50% of portfolio value during the first 10 months of this year.

Some investors were smart enough to realize the fallacy of buy-and-hold in a bear market and bailed out of their positions while they could. Others stayed put and have paid a very steep price for the education received. Do yourself a favor and read Al’s above article again—and then pass it on to a friend.

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