Going Golfing in a Bear Market
- Help me with my golf game
- What’s a bear market?
- A dividend that’s never gone down
I hope you had a great weekend. I got out and played 18 holes of golf; always a humbling experience. The game of golf is a great metaphor for investing. Sometimes you can do everything right given the information you have, and things can go against you in a truly astounding way.
I keep my left arm straight, head down, follow through and just as often as not, I’m peeking into someone’s yard or digging through brambles for a $2 plastic ball. (By the way if anyone has a foolproof method for curing a truly debilitating slice, please email me at editorial@resourceprospector.com.)
Likewise, sometimes you can do everything right in the markets and still lose. As prudent investors, we seek to buy companies with low price-to-earnings ratios in sectors with growth potential, with little debt and competent CEOs, a history of raising their dividend, etc. etc.
And all those best laid plans can go against us for any reason or no reason. Bad news in the broad market has made mutton of even the best companies.
That’s truer in bear markets than bull markets. People think of bear markets as periods of time where the broad market moves downward. But that’s misleading. Bear markets typically dip downward at times, but mostly move sideways.
Given that definition, I think you can make a strong argument that we’ve been in a bear market for at least 10 years.
Of course, there’s no way to know when the bear market really ends. Like a poorly hit tee-shot, you can’t really tell until you actually see where the ball has gone before you decide if it was a bad shot or not. I’ve hit many a poor drive that landed in the middle of a fairway with a good look at the pin.
So I truly do not know if market will continue its bear market rally over the next couple months. I can’t answer that question, and anyone who claims to know one way or another is guessing.
As they say, the market can behave irrationally longer than an individual investor can remain solvent. That’s one of those irksome “rules” that doesn’t help anyone become a better investor. It’s useless because it doesn’t come to a logical conclusion, except to maybe behave irrationally, which is almost always disastrous.
So my advice? Don’t act irrationally. Sure, there are times to pull out the driver on a par 3, but that’s the exception, not the rule. In a bear market, it’s more important than ever to stick to your principles.
Use the tendencies of the bear market to protect your portfolio the way hedge funds do: by hedging.
To do that, you need to give your portfolio exposure to the likelihood of either a continued march upwards, as well as prepare it for the possibility of a downward fall.
The easiest way to prepare for good times and bad in the short term is to buy commodity stocks.
Oil stocks typically fare well when the market is doing well – for the simple reason that people use more oil to produce, transport, and consume more goods.
Gold stocks usually soar when the market does poorly because gold is seen as a safe haven against calamity in the market and in paper currencies.
Buying both types of stocks gives you exposure to the upside in either circumstance. Sure, you won’t make as much money as if you had simply guessed correctly and bought all gold stocks or all oil stocks – but do you really want to be using “guesswork” as an investment tool?
No. And today, buying gold and oil stocks is fantastically simple. If you want a set it and forget it gold investment, I recommend buying a “blue chip” gold stock like the company we currently hold in our Global Commodity Investor portfolio. It’s up 30% since our buy announcement.
As for oil stocks, next week, one of my favorite oil and gas companies is paying out a quarterly installment of its 7.7% annual dividend. You can find out the name of this company by taking a risk free trial subscription to Ian Wyatt’s service SmallCap Investor Pro. This company has paid dividends since it was founded – and raised their dividend an average of once a year. If you want to claim a dividend from this company, you have to be a shareholder before May 3, 2010. Click here for the full details.
Good investing,
Kevin McElroy
Editor
Resource Prospector
