How To Survive In A Bear Market—Warren Buffett Style

As the plausibility of a bear market continues to grow, I thought it would be useful to consider ways that we could react, should the market take a turn for the worst. Even better, let’s let Warren Buffett do it. Here are some quotes of things he’s said over the years that I think can give any of us at least a few reasons to rest easy.

1. “If a business does well, the stock eventually follows”In other words, regardless of the circumstances of the market at large, you can still look for good companies.

2. “If past history was all there was to the game, the richest people would be librarians”So don’t rely too heavily on the past. If we do enter a bear market, it may not be anything like other bear markets. Creative thinking and prudent planning going forward is what could reward you more than what relying on history will.

3. “In the business world, the rearview mirror is always clearer than the windshield”This goes well with #2. What lies ahead is by no means clear. Even so, you shouldn’t let the clarity of that rearview mirror discourage you from moving forward anyways.

4. “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”If this is so, then all we have to do is find wonderful companies. The pricing right now might do half the work for us.

5. “Let blockheads read what blockheads wrote”If you find that you’re reading the same garbage day in and day out, read something else. Like this blog .

6. “Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it”If we do in fact see some serious slides in the market, and they are indeed folly, don’t slide with them. Profit by using these times as a rare buying opportunity of the first magnitude.

7. “Only when the tide goes out do you discover who’s been swimming naked”In other words, don’t be naked. The tide just might be going out. Also, don’t buy companies that are naked. If they are naked, and the economy does start to slide, guess what we’re going to see?

8. “Risk comes from not knowing what you’re doing”If you feel like there is lots of risk right now, try something new. Look for different kinds of companies than you would otherwise.

9. “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful”In other words, do it the Berkshire Hathaway way. If everyone around starts looking fearful, go get your greed on.

10. “Wide diversification is only required when investors do not understand what they are doing”Don’t be scared away from stocks. If you feel like you need incredible breadth in your portfolio to “weather the storm,” try weathering it another way: look for what you know. Look for companies being sold at discounts. There is bound to be many.

Six Things To Do In A High Risk Market

When the market turns against you, what should you do? Sell everything? We discussed that choice in a recent column. Selling everything draws your “line in the sand” and announces that you have determined there is no future for you in the market.
There are other steps you can take when things start moving against you. Here are 6 actions you take today to help protect the money you’ve worked hard to get. In my next article, I will share several more ways you can help protect your stock market and mutual fund investments.

1. Decide at what price you will buy the stock or fund if it pulls back. Take a long look at where the stock has been the last few months. Has it gone up without any kind of break? It may be due for a pullback. WRITE DOWN your reasons for buying and the ideal price you’d like to own it at...and be patient. If you miss it, you miss it. Don’t chase stocks.

2. Manage your stops. Re-examine where your stop orders are and decide if you can live with getting stopped out. These days, stop orders usually need to be renewed or revised every 60 days. If your stock has moved up nicely of late, you should move your stop up as well.

3. Buy puts on stocks. You may own a stock where you have a profit. You may really have no intention of selling the stock soon. But you know that the individual stock may have gone up too far, too fast. Buy a put on the position. It is considered protection on your original investment. If the stock falls, the puts should climb in value. This will offset the drop you have (on paper) in the underlying stock. And if you’re right, and take a profit in the put, you may have enough cash from the put sale to buy more shares of that stock at a good price, now that it has dropped.

4. Buy half of what you would normally buy. You want to tread lightly in markets when the risk is high. Buy half of what you’d normally think of doing. You‘re automatically keeping more cash than usual on the sidelines, which is smart decision in a risky market.

5. Invest in a basket instead of an individual stock. Exchange-traded funds are a great way to do this. If you feel strongly that a current theme will work, but are unsure about the market, this may be your ticket. Thinking about swapping a single stock for a basket. You’ll get diversified since you own a basket of names instead of one single stock.

6. When stocks start to fall, think about selling stocks short. It’s not for the faint of heart, since being “short” leaves you on the hook, because your loss is unlimited. But remember, stocks don’t just go in one direction. What makes it an interesting market is that stocks go up AND down. One decision you won’t see on the list is the choice to do nothing, and just “sit it out” or ride it out. You’ve worked hard to get where you are financially, the last thing you should do is sit idle and let the market take your profits away from you.