5 Strategies for Investing Properly, Cautiously, and Intelligently in This Bear Market
By Stephen T. McClellan
Author of Full of Bull (Updated Edition): Unscramble Wall Street Doubletalk to Protect and Build Your Portfolio
This is a perilous period in the stock market; a deceptive bear market that disguises its downward drift. Beware of misleading Wall Street doubletalk, as it tempts investors into this dangerous bear market. The Street tends to discourage and even hinder proper investing. Its advice is unreliable and often contradictory. Professional insiders know better than to take the Street literally. To be an astute investor you must fathom the puzzling, strange, ambiguous ways of Wall Street that it would prefer to keep secret. Be a cautious, realistic, long-term investor. Preserving capital is paramount -- the most important investment strategy that I emphasize in Full of Bull. Entering this bear market is a risky strategy.
1. Keep Short Term Influences at Bay
The Street wants you to pay attention and generate commission trades on a regular basis, to create business. That is why it regularly alters stock opinion ratings and is always so optimistic. Brokers market stocks, analysts recommend stocks. They are not objective advisors. The investment world evolves around the exceedingly short-term trading mentality of Wall Street. So too the media. TV stock market programs need you to tune in everyday, every hour, to collect advertising dollars. The message had better be new and different every time you switch it on, to keep you interested. It is all about drama, ideas, news, and color to engage you. Companies and executives are similarly short-term focused. Their emphasis is on current quarter earnings results and managing Street and investor expectations low enough to "beat" the consensus. Keep these subjective short-term influences at bay. Put them in perspective. Pay some attention but do not let them be a consuming distraction.
2. Steer around confusing Wall Street gibberish.
A Wall Street Journal headline recently declared, "AIG Corrects . . . " Given the Street's eternal optimism and favorable bias, it uses the term "correction" to indicate a stock-price decline. I always viewed this as absurd since the Street never labels a stock-price rise as a "mistake." Thus, I assumed the article pertained to the dive in the AIG stock. What a surprise. It was referring instead to a 24% rally in the shares and described "what analysts said was a partial correction from the stock's sharp decline in the first four days of the week." This is an ultimate example of the baffling Street terminology and guidance. You need to cut through this malarkey, correctly interpret Wall Street commentary and opinions, and avoid the pitfalls of inappropriate research guidance. Step back, think, ponder, observe, and take an intelligent approach to investing.
3. Understand that being wrong is part of the process.
A Wall Street pioneer and renowned investment consultant, Peter L. Bernstein, who passed away recently, lived through the boom and bust of the 1920s and had a 70-year career as a Street portfolio manager. When asked what was the most important lesson gleaned during his seven decade run, he was emphatic -- the idea that " You can figure this thing out. You have to understand that being wrong is part of the [investing] process." His approach was always to consider the consequences if the investment decision is wrong. His strategy was to take big risks only with small amounts of capital, and only take small risks with big amounts of money. Investors must avoid incurring whopping losses. Have the discipline to reassess if a holding declines by some 20%. The economic and stock market outlooks are ominous. Investors should take a guarded stance.
4. Know that bear markets regularly tempt investors to wade back in.
During bear markets, each time there is a precipitous drop, it is followed by a modest recovery, masking as the beginning of a new bull market. Do not be deceived into believing that such bear market rallies are the outset of a new bull phase. Alan Abelson pointed out in Barron's that the new buzz word on the Street was "exit strategy," as the market faded following the March-April bear market rally. His view is that investors could have avoided this necessity with better foresight, that is, with an appropriate "entry strategy."
5. Beware of dead-cat bounces.
Even a dead cat will bounce if it falls far and fast enough. Any stock or market that drops similarly will experience a rebound at some point. After single-digit declines four quarters in a row, the stock market nosedive worsened to double-digits in the fourth quarter last year and again in the first quarter earlier this year. So a spring back in the second quarter was a reasonable occurrence. But it was hardly the beginning of a sustained recovery. The market could still easily plummet by at least 10% as the bear market endures. A reasoned, conservative investment approach precludes jumping into stocks given the hazardous conditions. However, this is not the counsel you will hear from Wall Street.
Use Wall Street's information and research content, not its conclusions or recommendations. Do not be fooled by the Street. Successful, long-term investors focus keenly on investment entrance strategy and conservative management of capital. It is not what you make, it is what you keep. The Street pays little heed to risk, the possibility of permanent loss of capital, in the pursuit of big gains. But an intelligent investor should seek consistency rather than outsize gains, and always pay attention to protection of capital, especially in these precarious times.
©2009 Stephen T. McClellan, author of Full of Bull (Updated Edition): Unscramble Wall Street Doubletalk to Protect and Build Your Portfolio
Stephen T. McClellan, author of Full of Bull (Updated Edition): Unscramble Wall Street Doubletalk to Protect and Build Your Portfolio, was a Wall Street investment analyst for 32 years, covering high-tech stocks as a supervisory analyst. He was a First Vice President at Merrill Lynch for 18 years until 2003, and ranked on the annual Institutional Investor All-America Research Team 19 consecutive times, The Wall Street Journal poll for 7 years, and has a place in the Journal's Hall of Fame. From 1977 to 1985, he was a Vice President at Salomon Brothers and before that held a similar position at Spencer Trask for 6 years. Before commencing his Wall Street career, he was an industry analyst with the U.S. Department of Commerce. From 1964 to 1967, the author served as an operations officer aboard the USS Suffolk County (LST-1173) in the U.S. Navy.
Mr. McClellan has a Chartered Financial Analyst (CFA) designation, is a member of the New York CFA Society and the CFA Institute, was President of the New York Computer Industry Analyst Group, and was President and Founder of the Software/Services Analyst Group. He has made television appearances on Bloomberg TV, FoxBusiness News, CBS, CNN MoneyLine, CNBC, and Wall Street Week. He has conducted several radio interviews on such programs as Bob Brinker's Moneytalk and given presentations to numerous organizations, at conferences, and to companies. Mr. McClellan has published articles in the Financial Times, The New York Times, Forbes, and other publications. His MBA in Finance is from George Washington University and his BA is from Syracuse University.
Reprinted with the permission of the publicist.