“The world is changed. I feel it in the water. I feel it in the earth. I smell it in the air.”Galadriel —
Now this, kiddies, is what a bear market looks like. Rallies fail, overnight gaps multiply like rabbits, and Pepto-Bismol sales skyrocket. But don’t be afraid. Bear markets are good for the soul. Like a stern schoolmaster, they are quick to punish but have your best interest at heart. That is if you know what you’re doing. If you don’t know what you’re doing then you probably hate bear markets with a passion.
Education, then, is the differentiator. Consider this my humble attempt at providing some context and clues, tricks and tactics for how to use bear markets to your advantage. I have a laundry list of items to cover in no particular order.
First, guess what lies at the end of each and every bear market? A big, fat bull. There it sits like a pot o’ gold at the end of the rainbow. Just waiting for those who survived the ravages of the mighty bear and still have capital intact to capitalize on the next upturn. If you die during the downturn, or worse, lose all your money 🙂 then you can’t relish in the spoils like the rest of us. So don’t blow up over the coming months, okay?
Second, no one knows the duration and magnitude of the bear market. Doomsayers will say we’re, well, doomed. 2008 was a cakewalk compared to what’s to come. Boo on them, I say. Perma-pessimism is a curse. Don’t fall under its spell. It’s never as bad as the chicken littles say. On the flipside are the Pollyannas donning rose-colored glasses? While I certainly have more in common with this crowd, they tend to overstate the bulls’ case. Beware both groups. The truth always lies somewhere in between. ALWAYS.
Third, the faster the market goes down the better. What, you want a long, drawn-out affair? Not me. I prefer my bears to be the vicious, swift killing type. Rip the dang band-aid off, son. The quicker we get this downturn over with, be it 20% (already did), 30% (maybe), or 40% (I highly doubt it), the quicker we can feast on that fat bull. By the way, the worst bear markets are always accompanied by a recession. The odds of a recession in 2016 are extremely unlikely (so says people much smarter than me) so I highly doubt this bear market will be that bad.
Fourth, bear markets create fire sales in the crème de la crème. You know those stocks you wished you scooped up in 2008 that have since gone on to conquer the world? I’m looking at you Mickey Mouse (DIS), and you Apple (AAPL), and you Netflix (NFLX). Well, these beauts are getting cheaper and cheaper as we speak. We can only hope for an opportunity to grab all three in the $70s. Create your shopping list!
Fifth, if you’re passive accounts are getting shellacked and you want to do something to improve your experience during the bear markets you have to stomach in order to capture the equity risk premium (big kid word requiring more explanation, I’ll have to cover later), then consider adding options to the mix. Covered calls, anyone (see here and here)? Or how about protective puts (outlined in an epic newsletter Tagging the Golden Goose)?
Feel free to chime in the comments section with any bear market observations worth sharing. Karma will smile on you.
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