It’s Time to Outsmart the Bear – And These Four Strategies Will Help You Do It

Jul 08, 2022

I’m generally not a fan of the mainstream financial media.

And with good reason.

The news organizations whose headlines help create the “buzz” that revs up public opinion and inflames social media for the most part just “report” (repeat) what others say – because they’re not the experts themselves. You believe you’re getting special, insider insights – actionable and wealth-focused. But the “stuff” you’re getting has actually been funneled your way from government officials who are “talking their party line” or investment pros who are “talking their books” – meaning it’s self-serving, and not special at all.

Given my abhorrence for the mainstream financial media, I was surprised to realize I strongly agreed with a recent market analysis published by one of the most popular financial websites.

The writer summarized the top predictions, strategies, and investment advice of some top Wall Street strategists.

The insights presented by those Wall Streeters lined up so perfectly with my current beliefs that I felt like those folks had read my mind.

And if you want to survive, thrive, and zero in on the few real breakout winners we’ll see in this whipsawing market, these are the only strategies that matter.

If you want to put them to work – and you should – keep reading.

Make Yourself a Winner – Starting Now

The first snippet of wisdom comes from Victoria Fernandez, the chief markets strategist at Crossmark Global Investments, who urged investors to zero in on the best of the best:

“Our big focus is on quality – quality of earnings, quality of balance sheets, quality of the business model. These are the companies that we feel will hold their own against the expected volatility.”

I’ve talked about the “quality imperative” so often – in internal strategy sessions here at TradeSmith, to you and my other Money Talks readers, and in the investing presentations I make as I crisscross the country – that seeing a Wall Streeter say the same thing with such conviction almost gave me goosebumps.

In short, this is no time to speculate – it’s the time to be a “real investor.” Don’t think about “buying stocks.” Act like you’re buying real businesses.

This is more than semantics; it’s a mindset – and a mindset with a measurable payoff. When you think about stocks as businesses, you tend to be more selective. You look for “quality.” Quality companies have what super investors like Warren Buffett characterize as an “economic moat.” In other words, we’re talking about businesses with defensible positions in their own industries: dominant market positions, strong balance sheets, and hefty (and sustainable) profit margins that can generate consistent free cash flow through even the most challenging times.

Embrace the Power of Dividends…

The next perspective comes from Scott Clemons, the chief investment strategist at the investment bank Brown Brothers Harriman, who said there’s a special “identifier” that will help you single out the best opportunities. And that identifier is the dividend:

“We’re trying hard to keep nervous investors in the market, reminding them that no one rings a bell at the end of a bear market, and that the recovery can be both swift and counterintuitive … however, for nervous investors, we do point to the benefit that dividends offer, not just for cash flow, but as a marker of a company with plentiful free cash flow and a strong balance sheet. Quality wins over time!”

Now, I don’t necessarily agree that “buying and holding” through a bear market is a great idea for everyone.

Most investors don’t have the emotional discipline to do so successfully – which means they end up dumping their underwater stocks at the absolute worst possible time. Our research here at TradeSmith suggests most would do better over the long run using an exit strategy like a trailing stop loss to remove emotion and limit risk.

However, I completely agree that a focus on dividends is a winning strategy.

As I’ve told you here before, dividends are responsible for roughly 40% of the stock market’s total return over the long run. (The other 60% comes from capital gains.) But in a bear market, dividends have accounted for 70% or more of the market’s return.

Think about that: 70%.

That means dividends should be a cornerstone of any good bear-market investment strategy.

In addition, as Clemons noted above, a solid dividend yield can also be a “signpost” that you’ve found a high-quality company.

While there are exceptions, a company generally can’t maintain a steady dividend for long unless it’s generating plenty of cash.

…Sustainable Dividends, That Is

Next, Gabriella Santos – global market strategist at J.P. Morgan Asset Management – piggybacked on the benefits of owning dividend-paying businesses. But she also underscored the idea that not all dividends are created equal:

“In a more uncertain economic backdrop, we would focus on companies with high sustainable dividends. They help to lower the beta of the equity portion as the dividend helps to offset the capital depreciation, and also because these are companies that tend to be in defensive sectors like health care and staples … we would emphasize the sustainability of the dividend though — as well as the valuation — looking at metrics like sustainable cash flow, a strong balance sheet, steady earnings, free cash flow yield, P/E, and EV/EBITDA.”

Sustainability. That’s not just an excellent point.

It’s a crucial point.

Dividends can be a fantastic “buffer” in a bear market, but only if they’re sustainable.

In addition to the metrics mentioned above, it can also be helpful to look at a company’s dividend history. Any company can potentially pay a solid dividend for a year or two. But only the best can deliver a steady, growing dividend year after year.

Quality Above It All

The final perspective comes from Keith Lerner, co-chief investment officer (CIO) at Truist Financial, created by the 2019 merger of SunTrust Banks and BB&T. Like the other strategists, Lerner underscored the importance of owning high-quality companies today. And it follows that owning lesser-quality firms can be risky – if not ruinous.

“In our view, investors should focus on profitable and stable growth, companies that are still showing positive earnings revision trends, and which have lower sensitivity to economic growth. We would avoid high beta and higher leveraged companies given the global economic slowdown and widening credit spreads.” I couldn’t agree more.

In a bear-market environment, it’s crucial to focus on quality – because this is absolutely no time to gamble.

It’s best to avoid risky, speculative investments. But if you still happen to own any of this stuff, I urge you to “take out the trash” and get rid of them now.

If you do nothing but follow these simple guidelines – focus on high-quality companies paying sustainable dividends while avoiding risky, speculative stocks – I’m confident you’ll weather this bear market better than 99% of investors out there.

Which of these snippets of wisdom hit home for you? Are there other simple-but-powerful longstanding maxims you’re using? Share your story of how they’ve worked for you. Drop me a note here at [email protected]. I can’t respond to every email, but I read them all.