Is this a new bear market, and if so, how can investors adapt? Is this still a bull market, and investors should just take a deep breath and buy? Or is it a completely DIFFERENT kind of market, one more akin to what we saw in the 80s and 90s rather than 2009-2020? Four of our smartest, most-experienced MoneyShow contributors weighed in with their takes this week – and shared their advice for navigating the rest of Q4 and beyond.
Keith Fitz-Gerald 5 with Fitz
We’ve seen this script before. The headlines will make you think the end of the financial universe is upon us because of China, Russia, the Middle East, politics…whatever. Yet, profits are always the currency of success.
As for interest rates, how much of your money are you putting into T-bills now that rates have topped 5%? The venerable Stuart Varney wanted to know and my answer was “My excess cash.”
Many people think about safety and, no doubt, that’s important—but the real key is making sure that your money is available for any pullback or bargain hunting. Earnings of 5%+ while you go shopping strikes me as a dang good deal!
Meanwhile, I suggested recently that ExxonMobil’s (XOM) Pioneer Natural (PXD) merger would be the first of many moves in this space as the bigger, more powerful players go on a shopping spree.
No sooner said than done. Chevron (CVX) agreed to buy Hess (HES) in an all-stock transaction valued at $53B or $171 per share, based on Chevron’s closing price as of October 20. It’s a super-smart move, and the timing is perfect.
The purchase diversifies Chevron’s portfolio while also giving it access to the Stabroek Block in Guyana and the US/Canadian Bakken assets, which further plays to domestic energy security. There are Permian assets, too.
I expect the purchase to generate significant free cash flow for the foreseeable future. That’s great for the dividend and the true shareholder yield, which was recently about 10.1% versus the listed 3.65% most investors will see on their favorite public investing websites. You know what to do, or at least I hope you do.
Some parting thoughts: Many people find themselves glued to their iPhones, computers, tablets…whatever…right now. And I get why they feel that way.
Respectfully, think about this for a second.
Wall Street has spent billions learning to push your buttons while rigging the game at the expense of anybody who gets caught up in the short-term lottery mentality that is so pervasive right now.
The real flex is being able to walk away from your screens. Just sayin’.
Compounding Quality Compounding Quality
The reason we’re writing about how to survive a bear market today? Our friend Gautam Baid is publishing his brand-new book The Making of a Value Investor. Gautam Baid and Compounding Quality had dinner in Omaha the day before the Berkshire Meeting in May 2023 and we’ve been friends ever since.
It’s great to learn from your own mistakes, but it’s even better to learn from other people’s mistakes. That’s exactly why Gautam’s book is a must-read. In his book, Gautam writes about how he experienced the last brutal bear market and how it formed him as an investor.
Compounding Quality: Welcome Gautam. It’s nice to see you again. Your book The Joys of Compounding is a fantastic read and has sold more than 100,000 copies. You’ve written a second book called The Making of a Value Investor. What’s the key takeaway from this book?
Gautam Baid: The key to success in investing is long-term survival.
How to survive? Make sure that you hold tennis balls (quality stocks) and not eggs (junk stocks) when you’re in the middle of a storm.
Quality investing is the way to go. You build wealth by investing in high-quality businesses led by high-quality managers. That’s the main thing I learned from the latest bear market.
When you combine investing in quality businesses with diversification and patience, beautiful things will happen.
Compounding Quality: What’s the main difference between reading about bear markets and experiencing one?
Gautam Baid: You can read a lot about stock market crashes, but experiencing one is totally different.
The key to making money in stocks is to not get scared out of them. You must be present in the game for a very long time in order to win.
The most stupid investing mistakes are often made at the height of a bull market and the bottom of a bear market:
- Panic buying in a bull market
- Panic selling in a bear market
The key to success is to not take too much risk in a bull market and to not be too risk-averse in a bear market.
It takes a couple of cycles (bull and bear markets) before you’ll become a disciplined investor. Mentally prepare yourself for bear markets and be aware that you’ll make plenty of mistakes during your investment career.
Compounding Quality: What’s your key lesson from the latest bear market?
Gautam Baid: The latest bear market taught me two things:
- I should focus more on capital preservation
- No matter how well you prepare yourself, risk can always come from places you couldn’t even imagine
The only protection against unknown unknowns is diversification. That’s why I try to diversify my portfolio to 20-25 stocks across different industries.
Compounding Quality: Did you suffer from self-doubt during the latest bear market? And how did you handle it?
Gautam Baid: I suffered from self-doubt for sure.
“Nothing seems to be working in this market. Maybe I am really just an average investor at best. Maybe I just got lucky in the past. Maybe this is the bear market talking inside me. I am not sure.” – Gautam Baid
It’s a very normal reaction. I’d say that you just have to deal with it. You must take the short-term pain in order to get the long-term gain. Investing is all about delayed gratification.
What helped me was to not look at the stock prices of the companies I owned every single day. Instead, focus on the fundamentals and always think on the long term.
The only way you can survive a bear market is by being truly passionate about investing and stocks.
Thomas Hayes Hedge Fund Tips
Unlike Paul Tudor Jones who called it “Black Monday” the Friday (Oct. 16th) before it actually occurred in 1987 (Oct. 19th), these two academics lack the market understanding for a repeat. They are running out of October Mondays. Here’s what the nervous Nellies are focused on:
They point to the fact that because M2 Money Supply has contracted on a YOY basis, we are in “real danger.” Unfortunately, this is the intellectual equivalent of focusing exclusively on the liabilities in a balance sheet and not the assets.
They go on to say: “Because of the sustained decline in the money supply, the economy is in real danger. So far, only the remaining excess money the Fed created between 2020 and 2021—the cumulative excess savings from the Covid handouts—has been keeping businesses hiring and consumers spending. The effects of the excess money are still giving the economy a lift, but that extra fuel is almost exhausted. When it dries up, the economy will run on fumes.”
What they fail to acknowledge is there are $4 TRILLION of excess “fumes” from an unprecedented increase in Money Supply – due to an unprecedented shutdown in the global economy in 2020-2021. I drew “trend lines” so you can see just how wildly “above trend” we are:
In other words, money supply will have to contract for multiple years just to come back to the long-term uptrend. This is one of the reasons we believe inflation should run above trend (in a reasonable range of 3-5%) for a few years.
Like losing weight, there is an equation. The “easier” the loss (pill or needle), the greater the chance of impermanence or side effects. The “harder” the loss (healthy eating and lifestyle), the greater the chance of sustainability and improved health.
We had “easy” printed money for a few years, now we are getting involuntarily taxed (through inflation) in arrears (at the checkout counter) for that benefit received. Every equation has an equal sign. If you want greater returns over the long term, you have to assume greater concentration and volatility in the short term. Anyone who tells you otherwise, run away.
The key way to sit with equanimity when others are selling in the hole and running for the hills is to look at each BUSINESS you own. Not stock. BUSINESS. Ask yourself the following question for each company:
“If I owned this business in a private equity portfolio, is there anything that has changed about the business operations or ability to generate cashflow over the long term, that would require me to mark the value of the business DOWN in the portfolio?”
If your answer was, “Someone sent me a chart of 1987 and I’m scared,” that is not the correct answer and you should find another hobby.
After reviewing the comprehensive data, the only thing I can suggest is to follow Wilson Phillips’ profound advice from their 1990 hit “Hold On:”
Don’t you know?
Don’t you know things can change?
Things’ll go your way
If you hold on for one more day
Can you hold on for one more day?
Things’ll go your way
Hold on for one more day…
Jim Bianco Bianco Research, LLC
Jim Bianco is President and Macro Strategist for Bianco Research, LLC. In this wide-ranging interview, the long-time independent researcher explains why he remains a “unique optimist” even though he believes today’s higher rate, higher volatility, and higher inflation environment isn’t going away. Jim believes the post-COVID economic and market backdrop is completely different than the 2009-2020 era, warning that those who say otherwise have their “anchoring all backwards.” He adds that today’s investors would be best served by investing like their predecessors did in the 1980s and 1990s. Back then we had higher rates, but the economy handled them just fine, and the “Peter Lynch Picking Stocks” approach worked well.
Read the full article here
