If You Fail to Plan, You Plan to Fail

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What a glorious time to be invested in the stock market! The market has rallied 14% since the election on Nov. 4, the major indexes have rallied to hit all-time highs. We are far from the “euphoria” that Sir John Templeton discusses as being the end of a bull market.

Despite all the good news, it’s impossible to know with certainty when it will come to a screeching halt. The hardest thing to do—we may even call it impossible—is time the market consistently. Someone may get luck once, or maybe even twice, but to time it again and again is a fool’s errand.

At Iron Gate Global Advisors, we have what we call a “Bear Market Game Plan.” It’s part of our process that we implement when that Bear Market rears its ugly head. Below are a few of the characteristics of our plan.

  1. Know when to sell your stocks: In any potential bear market, there are normally bubbles of some kind. In 1999-2000, it was tech stocks. In the recent financial crisis (which is still causing people angst), it was the real estate market. When you see euphoria in those bubbles, which cause out of control valuations, it’s important to rid yourselves of exposure to those areas. In 2000, following the tech bubble, the market (S&P 500) finished with a negative 9.10% return, while our investors enjoyed a 21.83% return. This came because we avoided the tech bubble. We followed our process of buying stocks that were good businesses, not good hype.
  2. Know when to allocate capital: One of the best things we did in the most recent bear market of 2008 was allocating capital. By this I mean we bought great businesses that were trading dirt-cheap. These companies had great businesses that were being sold simply because everything in the market was being sold off. Buying great businesses with incredibly low valuations is always important, but never as important as it is during a bear market. When everyone is “fearful,” that is the time to be “greedy,” as Mr. Buffett teaches.
  3. Options: This is a weapon in our arsenal that not a lot of other firms have. This allows us to sell covered calls on the stocks we don’t want to sell, as well as short those areas of the market where the “bubble” resides. Think about this for a moment. If we can create additional income (cash flow) through options, we will can re-invest that income into the stocks that we love and are selling at dirt cheap prices. This potentially allows us to compound returns more quickly, as we’re able to put more cash to work. At the minimum, it potentially allows us to create additional income to help those that need that income to survive monthly.

While each bear market is slightly different, our process is one that provides comfort to our clients by knowing that we aren’t just a buy-and-hold firm. We are actively managing money in a way that builds capital and protects it, as well.

Here’s to wise investing,

Brett Pattison

 

*Options can be complex for some investors and may result in the loss of capital beyond an initial investment. Options are not for everyone. Please consult with your financial advisor to learn if they are right for you.

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Categories: Markets, Personal Finance, and Strategy.