Principles of the Stock Market » Bear Markets

Bear Markets  

Posted Dec 14 2007, 08:33 AM
by Richard Schwartz

HOW TO INVEST IN A BEAR MARKET?  Obviously that’s the new, emerging question to focus on.  Especially if you agree with me that the primary trend of stock prices has turned down.  I boldly wrote back on November 8th that we had entered a bear market and after a month I still feel that way.  So how and what to invest in remains out there as the biggest, most important and open question.  Just like in any new trend, be it REITs a few years back or solar stocks a year ago, “first movers” gain a big advantage (as long as they are right on the trend).  In other words get yourself into a somewhat bearish position quickly now and then wait for all those that are still bullish and fighting the new market trend to come over to your side.  When trends change slowly, as most long running bull markets do when they ultimately roll over, a good description for what’s been going on since this past summer, many investors will be very slow to admit such change has occurred.  That provides a big opportunity for the rest of us, the minority who can identify and embrace change.  Since you’ve already switched positions, in today’s case adopting a more bearish stance, then when others start agreeing with you, your first movers advantage will make your days, nights and profits more enjoyable.  Hey, that’s a good rule, right there!  One rule is to move to a position whereby you sleep soundly at nights.  Sounds trite or silly right?  But I’ve found it really works.  Please consider: Hedge!  “Hedge your bets” is the old saying and it works.  Start off by hedging your long positions.  This way you don’t have to sell your long positions which is difficult since that incurs tax consequences and requires some agonizing decision making an more.  Adding a couple shorts in today’s modern investing world is easy (yea!) and won’t be as hard as selling would be.  Say buy a couple ETFs or inverse mutual fund positions and see how you then sleep that night.  I think you’ll sleep more comfortably.  You’ll feel more in control.  You’ll feel whatever you wake up to the next morning, you’re prepared for and won’t hurt as much if it’s a big down day.  Studying very successful, long term investor Jim Rogers as closely as I have lately, I’ve heard him say and read as well that he’s always hedged.  In Jack Schwager’s MARKET WIZARDS (get yourself a copy on Amazon.com or elsewhere) are the following passages:  “In December 1986, I shorted the financial stocks, and throughout 1987, I didn’t lose any money, even though the Dow and the S&P were going through the roof.”  And:  “Whether I am bullish or bearish, I always try to have both long and short positions---just in care I’m wrong.”   SCHWARTZ RECOMMENDATION:  So get your feet wet!  As soon as possible to see what it feels like.  Sure, hedging your bets means you won’t make as much on the upside as you would unhedged.  But are you really looking to make big upside profits here with the stock market just a touch off its bull market highs and with a financial freeze up in place and the economy walking a tightrope whereby falling off would mean going into recession?  And with food and energy inflation more problematic than over the last 20 years?  No, I think you’re more in the market now because of inertia and because we all know that’s the primary way to make money, hanging in there over time.  To ride out the ups and downs. I would recommend starting off by shorting the small or mid cap averages.  These companies don’t benefit from overseas growth, have had a big, multi-year run and are driven by individual investors which have mainly abandoned the stock market.. There are many ways to short them today.  Again we’ve made great strides in financial services and one big one is that it’s easy to make money on downtrends today.  Just buy yourself and your clients some exchange traded funds which go up if the indexes they track go down.  For example, look into symbols like MYY and SBB or leveraged shorts like MZZ or SDD.  You might want to short the S&P 500 too because its got lots of financials in it.  Look into symbol SH or the leveraged SDS. You can even find shorts on specific sectors as well.  And then there are many inverse mutual funds you can use as well.  Check into ProFunds or Rydex funds and you’ll find lots of choices like symbols SHPIX, UCPIX and BRPIX.  Disclaimer!  I hold some of the above after taking my own advice.

 



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