Bear Market Investing For Long-Term Investors

I was watching CNBC recently (I know) and many of the advertisements between the programming focused on bear market investing with an encouragement to buy some trading algorithm, or making rapid buy and sell decisions, or something or the other. The technical definition of a bear market is any decline of 20% or greater from a prior high, but the common usage of the term can sometimes refer to declines that aren’t as deep but come more rapidly.

Most people are either sold on the idea that they can develop the capability to sell a particular investment before it declines substantially due to overall economic conditions, or they feel the need to do something as paper wealth disappears before their very eyes.

I suggest an alternative route. Instead of posing the question, “How can I sell stocks and/or avoid dramatic paper losses?” and acting accordingly, I instead believe the best approach is to pose the question “How can I structure my household’s assets in the best way possible to endure whatever may come, including paper losses in the equity markets, so that adversity can be best absorbed rather than avoided?”

I come to this conclusion based both on my historical studies of how fortunes are built (by owning cash generators that generate profits for their owners even when times are tough so they can play “offense” during a bear market by acquiring more assets on the cheap) as well as the common-sense notion that the prospect of earning returns that dramatically outperforms a basic U.S. Treasury bill must come with some cost, and the cost is that the paper values of your assets may fluctuate substantially in the short-term. I am skeptical of any other advice that pretends the piper must not be paid.

Instead, I follow Benjamin Graham’s advice from The Intelligent Investor: “The real money in investing will have to be made–as most of it has been in the past–not out of buying and selling, but out of owning and holding securities, receiving interest and dividends, and benefiting from their long-term increase in value.” Insights like that are why The Intelligent Investor is still read, almost a century after its original publication.

People want to know what to do in advance of a bear market? They should do this: (1) continue to develop a specialized skill that has a market demand for their services and/or operate a business that generates surplus value in all economic cycles; (2) keep 10% to 30% of one’s net worth in cash, as a safety reserve and for playing “offense” when the ephemeral opportunities cross your desk; and (3) own equities in the best companies in the world, such as Coca-Cola, Nestle, Johnson & Johnson, Colgate-Palmolive, 3M, and a few dozen others whose business models you understand and whose stock you can buy at a reasonable price.

And then execute this strategy over and over again. Why does it work? Because when asset prices fall, you already invested in entities that will not only survive and rebound, but generate dividends of their own that can be reinvested at lower rates that will turbo-charge wealth on the upside. The advantage of cash holdings and a cash-generator (such as a lucrative career or a business that you run) is that you can, at a minimum, steel your resolve when prices fall, and at best, play offense buy acquiring assets when they are cheap. Processing adversity intelligently is superior to creating the illusion that it can be avoided.

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