Bear Market Strategies
One of my favorite blogging couples over at Defined Sight, inspired me to write this post about bears. In addition, my favorite backpacking, hiking and dividend stock blogger, Stockles, prompted me to write about the investing angle. Judging from the picture, you may be able to guess the topic: bears and bear market strategies.
Mrs. DD (my wife) and I love the mountains. Living in the mostly flat and sometimes frozen tundra of the mid-western United States, our vacations consist of hiking in mountainous regions of the United States or Canada. We pack sandwiches for lunch, day hike for 5 to 10 miles and enjoy the exercise, fresh air and natural beauty.
However, we have had a couple of bear encounters during our hikes. Two small grey-haired bears in North Eastern Canada scampered away quickly when they saw us. It wasn’t a very threatening situation. I’m not sure what kind of bears they were.
FASTER THAN THE BEAR
We encountered a big black bear in Grand Teton National Park in Wyoming a few years ago. The bear looked like the one in the picture above. He came out of the woods and on to our trail slowly walking towards us.
How I felt: Terrified.
We turned and started going back up the trail in the opposite direction. Fortunately, Mr. Bear turned off the trail and meandered back into the woods. This all happened in less than 5 minutes.
After surviving the encounter and returning home from vacation, Mrs. DD started spreading a story to her friends, family, and co-workers. She told them that when I saw Mr. Bear, I slapped peanut butter on her, pushed her down and took off running.
My side of the story is a little different. That is, I took her lunch sandwich, threw it at the bear and then took off running. I didn’t have any peanut butter and I would never push Mrs. DD down on purpose.
One of Mrs. DD’s co-workers summed up the situation quite well. He said, “you don’t have to be faster than the bear, just faster than whoever you are with.”
BEAR MARKET STRATEGIES
My bear market strategies for stocks are a little different than our methods to cope with a real life bear. In either case, running away may or may not be the best option. It depends.
With that in mind, a couple of weeks ago on my post Dividend Stock Triple Play, Stockles wrote:
“Please write more about how you felt when some of your companies had a bad period (and the future outlook was negative). That’s what I find most interesting.” See you, Stockles. Here are a few thoughts in response to Stockle’s comment.
BATTLING A BEAR MARKET
How I felt: Scared and uncertain
I’ve survived and invested through the bear markets that started in 1987, 2000 and 2007. During these periods, I was always a net buyer of stocks. I follow Mrs. DD’s co-worker’s wisdom. I am not faster than the bear, but I am faster than most everyone else. I just hold my ground while other investors panic, sell and run. The herd is usually a lagging indicator. They let the bear eat them alive by selling and realizing their losses.
It’s not easy to hold your ground in the face of a bear market. Especially in 2008 and 2009. These situations unnerve me. However, here is my advice: if you aren’t capable of handling a 60% reduction in stock prices, reduce your asset allocation to stocks now.
Having that experience and given our ages, we only have a 50% asset allocation to global stock markets right now. This is down from 80-90% in our youth.
I don’t see myself going much higher than 50% ever again. Bonds are boring, but bonds provide stability in an investment portfolio.
ENDURING AN UNBEARABLE DIVIDEND CUT
How I felt: Stupid, hurt and angry
Being a dividend growth stock investor over the past 15 years, I have endured my share of dividend cuts. Fortunately, I get more stock selections right than wrong. But, I am not immune to mistakes.
Dividend cuts give me great pain. I really dislike them. General Electric is my most recent experience. My typical rule is when a company cuts its dividend, I look to cut my losses and run away as fast as I can.
As a result, I look for a short term bounce in the stock price and exit the position. The company has lost my trust. In addition, I don’t want to be involved with management that doesn’t have the foresight to set a dividend policy they can maintain over the long term. Consequently, I move on from a bad relationship.
ISOLATED BEARS – INDIVIDUAL STOCKS
How I felt: Analytical and Reflective
This occurs when the overall stock market is in a trading range or rising. However, a specific stock I own is in decline.
For example, 14 months ago Philip Morris (PM) was my second largest stock holding. Since then, it has suffered a 34% decline even though the overall stock market is higher.
In a situation like this, I first reflect and am thankful for diversification. In the same period of PM’s decline, Microsoft (MSFT) has taken over my number 2 spot while I have enjoyed a 45% gain in that holding.
Next, when a stock goes through it’s own individual bear market, I ask myself some questions. What is the market telling me? What is going on in the business? Is the dividend at risk of being cut? What do the metrics look like based on an updated analysis of the company stock?
With the answers to those questions in hand, I can make an educated decision to buy, sell or hold. So far for Philip Morris, I have decided to hold. With the recent dividend increase announcement, I may even add to the position.
There you have 4 bear market strategies:
- Bears in woods – Be faster than whoever you are with
- Bear markets – Scared, but hold ground
- UnBEARable dividend cuts – Kiss that bear goodbye
- Isolated bears – Analyze what is on the bear’s mind
Do you have your own bear market strategies? What do you do when you come upon a bear? Whatever you do, don’t feed it.
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Long PM and MSFT. The information and bear market strategies on this site are for educational and entertainment purposes only. In addition, the information is not to be used as investment advice specific to your circumstances. As a result, consult your personal investment and/or tax advisers prior to investing money. Most importantly, please realize you are solely responsible for any investment gains or losses from the investments you enter into. Finally, you can find additional information under this site’s Disclaimer & Privacy tab.