The Bear Market Playbook

In yesterday's essay, I talked about how the most important thing you can do in a bear market is position yourself to survive it... Markets go up, markets go down. They tend to go up more often than they go down... And over time, they go up. So it's important to be there when the […] Not rendering correctly? View this e-mail as a web page [here](. [Empire Financial Daily] The Bear Market Playbook By Berna Barshay --------------------------------------------------------------- [Strange Space Device Is The Next Medical Miracle?]( Used on board SpaceX Dragon, one device could change medicine forever... and give early investors a chance at life-changing gains! See the shocking device – [click here now](. --------------------------------------------------------------- In [yesterday's essay]( I talked about how the most important thing you can do in a bear market is position yourself to survive it... Markets go up, markets go down. They tend to go up more often than they go down... And over time, they go up. So it's important to be there when the tide turns. And while we all would like to fancy ourselves the crack market timer who can dodge the bad times and get back in position just as the good times are set to roll once again, it's nearly impossible to do this. As I explained yesterday, just 25 trading days out of nearly 8,000 accounted for almost 80% of the returns from 1990 to 2020. So to win in the long term, the most important thing is to make sure you stay in the game. Cull your portfolio to minimize the damage... then after you do that, position yourself to make the most money possible when the markets turn, while not taking excessive risk. When the times get tough, the tough investors scrub, re-evaluate, and upgrade their portfolios. Today, I'm offering my blueprint for doing that... I have seven steps for surviving this bear market... The first three steps are about assessing what you own, and the next four are about optimizing, rebalancing, and repositioning your portfolio to do well when things turn up. You may go through the steps and find you need to make a lot of changes... or you may find that you are in good shape. But even if you find that you don't need to make changes, going through the steps should add a level of intellectual rigor to your analysis and help build your conviction in your holdings. Volatility and drawdowns are never fun... But when you've done the hard work and have high conviction, it's a lot easier to stay unemotional about the bumps in the road and the paper losses. Before you even start with these steps, it's important to get into the right headspace for this work. If you are a little worked up, perhaps hit the gym or go for a walk before beginning this exercise. If you find yourself super stressed out about your portfolio or recent losses, a few days away from the markets might be a good starting place. Once you are ready, here's what to do... - Position-by-Position Portfolio Review Stock by stock, think about whether you really want to stick with the position. Look out for thesis drift – where you bought the stock for one reason, it didn't work, and now you made up a new reason to continue owning it. Think about the upside to downside ratio... If it's not at least 2 times, there may be more attractive opportunities out there with stocks down so much. Also, think about what catastrophic risks exist for the stock. Once you decide what you are going to toss, get out, don't look back... and let's get that money back to work in better bets. 2. Stock-by-Stock Position Size Review Try not to risk more than 1% on any given position. Stocks that are relatively safe – ones with fortress balance sheets, leading market positions, etc. – should be bigger. Speculative and risky positions should be smaller – but you don't need to exit them entirely. In fact, you shouldn't... because these smaller moonshot-type positions can add up to outsized performance when the market eventually turns. 3. Review for Hidden Bets Make sure you aren't inadvertently making the same bet over and over. You could be doing this by having too much money invested in one sector. You could be doing this by inadvertently investing too much money in stocks that are all sensitive to the same thing – such as the level of interest rates, inflation, or the strength of the housing market. You could also be overweighted to growth versus value, or vice versa. You could have too many companies with high financial leverage in your portfolio. It's OK to make bets... Believers in a secular bull market in energy are sitting pretty at the moment, just like the true believers in Software-as-a-Service ("SaaS") business models are sitting in a world of pain right now. Just make sure your eyes are open to the bets you are making. 4. Stick With Your Highest Conviction Ideas In a bull market, it's easy to get sucked into a stock that a friend recommended or that you read one intriguing article about. This level of diligence doesn't work in a bear market. Know your companies. That's where the real money gets made – leaning into the abyss and buying when everyone else is selling. You make the most money when you actually are right about a company and the market is wrong – which happens all the time, especially in bear markets. Some stocks of companies with great long-term prospects get absolutely slaughtered unjustly because they sit in a sector or have financial characteristics that are out of favor. Sometimes today's biggest losers will be tomorrow's biggest winners, so don't let recent price action shake you out of an idea when you have done the hard work to get to conviction. I have a name like this in my Empire Market Insider newsletter portfolio. It has been a total dog despite the fact it has been executing better than ever lately... so much so that my conviction in it is at an all-time high while the stock is sitting near an all-time low. I'm so excited about the opportunity in it today that I rushed to put together a presentation about it, [which you can watch here](. --------------------------------------------------------------- Recommended Link: [Elon Musk's secret fuel?]( In addition to leading the charge for batteries, electric vehicles, and solar-powered homes, the Tesla founder is quietly working on a new type of fuel to power his SpaceX rockets. McKinsey, a leading consultancy, claims this technology will change our lives forever and create a $4 trillion industry. And one little-known company at the forefront of this industry has the potential to become "America's Next Big Monopoly." If you missed out investing in Tesla, Apple, Amazon, Google, or Netflix early on... this could be your second chance. [Get the details here](. --------------------------------------------------------------- 5. Look for New Ideas Lots of people tell me they can't take on new ideas because they are already fully invested and stocks are down. But if stocks are down, it's the best time to go shopping for new ones! A bear market inevitably throws out babies with the bathwater... Go find them! And sell less attractive companies to make room for them. 6. Consider Some Hedges If you are comfortable shorting, you could try some pair trades in which you hedge a favorite stock by shorting the stock of a similar company that you like less. A lot of amateur (and even professional) investors aren't comfortable shorting individual stocks though... If this is your situation, you could look at buying some long-term puts on the market or a specific sector or stock if you want to limit risk. Another way to hedge is to diversify away from equities into other asset classes like gold, bonds, or crypto (personally, none of which get me excited right now). 7. Sometimes the Best Offense Is Defense To mute volatility in the bear market, consider reallocating some funds to more defensive stocks. More defensive sectors include health care, consumer packaged goods ("CPG"), real estate investment trusts ("REITs"), and utilities. These stocks tend to not go down as much in a bad tape, but also won't rally as hard in an up one. It's a way to stay in the market while taking your pedal off the metal a bit. There you have it... my bear market playbook. And while there's no one definitive way to navigate rocky times in the market, these rules and practices have served me well in the past – I hope they can help you too! In the mailbag, a reader makes the case for shopping in stores and a question about the role of Meta Platforms' (FB) Facebook in the tragic events in Uvalde, Texas... Do you have any rules that you follow in bear markets... or in the markets in general? Do you ever do a structured portfolio review like I am suggesting here? When you're fully invested, how do you make room for new ideas – do you find names to liquidate entirely, or do you proportionately sell down everything to make room for the new? Send me an e-mail by [clicking here](mailto:feedback@empirefinancialresearch.com?subject=Feedback%20for%20Berna) and let me know how you think about these portfolio-level issues. "Concerning offline shopping for online brands, there are certain item classes where I would never purchase online, such as larger non-DIY furniture and kitchen appliances, where I would want to compare the former for comfort, fabric, etc., and the latter for brand comparison. In addition, with age and physical limitations, I would not want to have to move these items into the house and, in the case of appliances, be responsible for installation and for removal and disposal of the old, replaced appliances. Were we to buy a new car, we'd also want to go to a dealer to test drive and evaluate any models in which we were interested. "However, in all cases, we would first research these items on Consumer Reports for ratings, and also review online pricing to give the seller a take-it-or-leave-it offer if we did decide to purchase." – Otto K. Berna comment: Otto, you have made a great case for why physical retail is here to stay... But your inclination to do a lot of research online before going shopping also makes the case for omnichannel retail as well. While you may be turning to Consumer Reports, many other shoppers will turn to retailer websites to gather product information as well as pricing information. And of course someone in different circumstances – whether it comes to age, price sensitivity, or proximity to a physical retailer – might make a different decision than you. But I agree – some things just make a lot more sense to buy in-store. ► "Facebook has to 'fact check' everything a conservative posts. Why didn't they notify law officers when the killer posted on Facebook that he was going to shoot up a school??????" – Micky C. Berna comment: Texas Governor Greg Abbott misspoke when he called the shooter's pre-attack communications on Facebook "posts." They were actually private messages... And it's much harder to catch things in messages than public posts. KHOU-11, the CBS affiliate station in Houston, had this to say on the topic... Facebook parent company Meta has said it monitors people's private messages for some kinds of harmful content, such as links to malware or images of child sexual exploitation. But copied images can be detected using unique identifiers – a kind of digital signature – which makes them relatively easy for computer systems to flag. Trying to interpret a string of threatening words – which can resemble a joke, satire, or song lyrics – is a far more difficult task for artificial intelligence systems. Facebook could, for instance, flag certain phrases such as "going to kill" or "going to shoot," but without context – something AI in general has a lot of trouble with – there would be too many false positives for the company to analyze. So Facebook and other platforms rely on user reports to catch threats, harassment, and other violations of the law or their own policies. As evidenced by the latest shootings, that often comes too late, if at all. The private messages were to another teenager in Germany. She failed to report them until after the attack had taken place... But given the logistics – the fact she was far away in another country with no knowledge of U.S. reporting systems, and only 15 herself – it's unclear that her attempting to report it earlier would have changed the outcome. It sounds like there were only about 30 minutes between the private message to the German teen and the attack. The shooter's grandmother, however, survived being shot in the face and was able to call and warn law enforcement, who were there at the school before the shooter ever entered it... There are of course a lot of open questions yet to be addressed about law enforcement's response, specifically the fact they were there before he went into the school and allowed him to stay in the classroom for 77 minutes before engaging him. I have been openly critical of Facebook's track record on content moderation and getting ahead of violent events planned or communicated on the site... But I think in this case, the platform is absolutely in the clear. Regards, Berna Barshay June 2, 2022 If someone forwarded you this e-mail and you would like to be added to my e-mail list to receive e-mails like this every weekday, simply [sign up here](. © 2022 Empire Financial Research. All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from Empire Financial Research, 601 Lexington Ave., 20th Floor, New York, NY 10022 [www.empirefinancialresearch.com.]( You received this e-mail because you are subscribed to Empire Financial Daily. [Unsubscribe from all future e-mails](