PDF Summary:Bear Market Investing Strategies, by Freeman Publications

When the markets inevitably stall, stock and fund investors face losses if they're unprepared. Bear Market Investing Strategies by Freeman Publications offers a roadmap for navigating the upcoming downturn. You'll learn how to identify the telltale signs of looming disaster as asset bubbles inflate, so you can sell off portions of your portfolio before values plummet.

This guide also covers tactics for hedging your existing stock and bond holdings, where to safely park cash during selloffs, and how to profit from shorting overvalued assets. You'll discover strategies for coping with volatile bear markets psychologically, avoiding shady investment scams, and positioning yourself to pounce on the rebound when it comes.

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• Use a distraction-blocking app to limit access to investment websites and apps during volatile market periods. By setting up the app to block financial sites during times when you're most tempted to check your portfolio, you can focus on other activities and reduce the anxiety associated with frequent monitoring.
• Create a personal rule that for every new subscription service or recurring expense you want to add to your budget, you must first identify an existing expense to eliminate or reduce. This way, you maintain your current expenditure level and prevent financial loss from accumulating unnecessary costs.
• Create a game with friends where you each pick a stock and set a trailing stop level. Over a set period, track who would have 'locked in' the most profit based on these trailing stops. This social approach to learning can make the concept more engaging and provide insights into different trailing stop strategies.

Adopt a Disciplined Method for Evaluating Investment Opportunities

The author explains that to achieve success, you must analyze information in the most rational way possible. This involves assessing the company through a system of progressively accurate information. Start with the most accurate sources of information like the company's filings, and work through corporate announcements and conference calls before resorting to less accurate sources like mainstream outlets and social networks.

Analyze Companies Internally Using Financial Data

According to the author, being rational involves changing your approach when analyzing a company. The majority of investors begin with information available on social media, websites, and blogs. The author recommends adopting a different mindset altogether. You must start with the information that the business provides and is mandated to show. Jim Chanos describes it as peeling an onion (Chanos, 2018). Start with the onion's center, which contains the most challenging but accurate information, and gradually proceed to the less emotional layers.

Practical Tips

• Develop a habit of writing down predictions about a company's future performance based on your analysis, and then revisit these predictions after a set period to evaluate your accuracy. This self-reflection exercise will help you identify which aspects of your analysis were on point and which need improvement, allowing you to adjust your approach for future analyses.
• Set up a monthly "information audit" where you review and assess the quality of your sources. During this audit, evaluate the credibility, track record, and biases of the information providers you've been following. Replace sources that offer more speculation than fact with those that provide data-driven insights or have a history of accurate analysis. This helps ensure that the information you use to make investment decisions is reliable and not just popular opinion.
• Engage in proactive communication with companies to request additional information or clarification. If you receive a product or service and feel the information provided is insufficient, reach out to customer service with specific questions. Document these interactions and the responses you receive to build a personal knowledge base. This can empower you to make better-informed decisions and hold companies accountable for the information they share with their customers.
• Create a visual map to track the layers of a personal project or goal. Begin with the end goal in the center and work outward, identifying the layers of actions, resources, and decisions needed to achieve it. This could be a poster board where you start with the goal of learning a new language, then branch out to the methods (apps, classes, practice), followed by a layer of scheduling, and finally obstacles and solutions.
• Create a "core question" journal where you write down the most pressing question at the heart of any challenge you face before considering any peripheral details. This practice forces you to focus on the central issue without getting distracted by less important factors. If you're trying to improve your health, instead of getting bogged down by diet trends and workout fads, ask yourself, "What is the one change that would most improve my health?" and use that as a starting point for your health journey.

Leveraging Alternative Asset Classes and Hedging Strategies

This section outlines various asset categories including gold, silver, and cryptocurrencies, and how these assets can be used to offset risk in your existing portfolio. It also covers short selling and using funds that aim to produce inverse returns.

Gold, Silver Can Protect Against Inflation and Market Crashes

Silver and gold are both considered safe hedges against inflation. The author says this perspective is inaccurate in the near future, but is accurate in the distant future.

Pros and Cons of Precious Metal Exposure

The author believes that the primary driver of both precious metals' prices is fear, and while you shouldn't rely on emotion in your investment decisions, you shouldn't ignore this regarding precious metals. Gold usually rises during the start of a country's recovery from a crash, not as it enters one. However, during times of uncertainty demand for physical gold usually rises.

Context

• While fear is a significant driver, the actual supply and demand for precious metals also play a crucial role. Mining production, technological demand, and central bank policies can influence prices.
• Recovery periods often see a shift in investor sentiment from risk aversion to cautious optimism, leading to strategic reallocations into assets like gold for diversification.
• When a country's currency is devalued, gold can serve as a stable store of value, prompting increased demand.

Selling Short Can Be Powerful but Requires Careful Management of Risk

Selling short enables you to gain from the decline of market assets. The author explains that this practice is not immoral, and a strong company cannot be sold short easily. In fact, many well-known investors have built fortunes utilizing this strategy.

Inverse ETFs Wager on Market Declines

Shorting is a relatively simple process from the retail investor perspective, but it does involve a certain degree of risk which many investors are uncomfortable with. Short positions can't be held in tax-advantaged vehicles such as IRAs. Instead, Freeman Publications advises using inverse ETFs, which move contrary to the base index or asset. However, be sure you understand the strategy the ETF manager uses because some are designed to profit at the retail investor's expense. Stick to well-known benchmarks and assets.

Other Perspectives

• While shorting does involve risk, it is not inherently riskier than other investment strategies if done with proper risk management and research.
• Inverse ETFs may not perfectly mirror the inverse performance of the base index or asset due to tracking errors.
• Some ETF strategies may be sound in theory but fail in practice due to unforeseen market events or the manager's inability to execute the strategy effectively.
• Retail investors have access to a variety of resources and tools to educate themselves about the risks and mechanics of inverse ETFs, which can mitigate the potential for exploitation.
• Focusing solely on well-known benchmarks and assets might cause investors to miss out on niche or emerging markets that could provide better inverse opportunities with higher potential returns.

Sectors and Industries Tend to Outperform During Recessions

This section details which sectors and industries perform badly and well amid market downturns. You can short the weaker sectors and industries and go long the stronger ones.

Discount Retailers, Consumer Staples, and Entertainment Thrive

The author explains that in market slumps, money will become tight, and you should focus your investigations toward companies with low capital requirements. Companies providing SaaS need little capital and have minimal overhead because they operate online. Another sector which thrives in these conditions is retail discounts. Consumers will consistently try to save money during times like this, prompting them to flock to discounters. For leisure, avoid luxury brands and instead look for services that offer inexpensive forms of escapes to consumers. Streaming services such as Netflix and Disney+, along with vices like tobacco and alcohol, are examples of companies and sectors that you should be looking into.

Other Perspectives

• SaaS companies may also incur high marketing and sales costs to acquire and retain customers, which can contribute to overhead.
• Some consumers may prioritize quality over price even during economic downturns, which could benefit retailers that focus on higher-quality goods rather than those offering steep discounts.
• The focus on streaming services like Netflix and Disney+ may not consider the competition from other forms of inexpensive or value-based entertainment such as gaming, which can offer a higher perceived value in terms of hours of entertainment per dollar spent.
• Regulatory changes or increased scrutiny on large tech and media companies could impose additional costs or limitations on the operations of streaming services, potentially affecting their profitability.
• Government policies, such as increased taxes on tobacco and alcohol or stricter regulations, could reduce the consumption of these products, even during economic slumps.

Implementing Specific Investment Tactics and Techniques

This section details specific strategies you can employ to improve your portfolio, such as using options, investing in bonds, and real estate investment trusts (REITs). It also teaches you how to avoid sectors and industries that traditionally underperform in downturns.

Limit Losses With Protective Put Options

The author explains that options are a fantastic way to guard against downside risk, especially during times of heightened volatility such when the market is declining.

Writing Cash-Secured Put Options Can Generate Consistent Monthly Income

A straightforward method to safeguard your equity portfolio is to implement protective puts. A protective put enables you to liquidate your holdings at a pre-determined price no matter how bad the market price gets. However, Freeman Publications advises that you should use this only as a safeguard. As for cash flow, you can use a cash-secured put approach to generate extra monthly income. By selling options this way, you're essentially taking the opposite position to the trader purchasing your put.

Practical Tips

• You can simulate the protective put strategy using a virtual stock trading platform before investing real money. Start by creating a portfolio of stocks in the simulator and then purchase virtual puts for those stocks at a price you're comfortable with. This will give you hands-on experience with how protective puts work and how they can impact your portfolio during different market conditions.
• Develop a decision-making flowchart to guide you through the process of selling put options. Begin by identifying the key factors that influence your decision, such as market trends, volatility, and the financial health of the underlying company. Use this flowchart whenever you consider selling a put option to ensure you're making informed and consistent decisions.

Invest in Bonds, Bond Exchange-Traded Funds, and the U.S. Dollar as Safe Havens

Bonds are seen as safe havens in bearish markets because their coupon rates and face values are fixed. In conventional bear conditions, bond prices typically increase.

These Investments Often Appreciate When Stocks Decline

Treasury bills, notes, and bonds are considered low-risk investments because you are loaning your money to the federal government, which isn't likely to fail in its obligations. You can use a bond ETF to access these different types of fixed income vehicles. The US dollar is also a safe haven when times are tough, as it's the world's preferred reserve currency, and tends to rise as other currencies decline.

Other Perspectives

• While Treasury bills, notes, and bonds are generally low-risk, they are not entirely risk-free; there is still a risk of inflation eroding the purchasing power of the fixed returns.
• The liquidity of bond ETFs can vary, and in times of market stress, it may be more difficult to sell an ETF at a desirable price, potentially leading to losses.
• Over-reliance on the US dollar as a safe haven can create imbalances in the global economy, leading to potential issues like currency wars or trade imbalances.

Diversify and Avoid Vulnerable Sectors

Freeman Publications teaches that the most important part of surviving a market downturn is diversification. Avoid concentrating your funds in just one company's stock. Use ETFs targeting specific sectors to invest in industries such as consumer staples and healthcare, which tend to hold their value during downturns.

REITs Provide Stability and Passive Income

The author states that REITs are an effective method to diversify your portfolio because they offer you the ability to invest in real estate without having to come up with large up-front cash deposits. This will provide you with passive monthly income thanks to the substantial dividend payouts. REITs that hold properties used by retailers offering discounts are especially attractive during market downturns.

Other Perspectives

• REITs typically focus on specific types of real estate, which can limit diversification if an investor's portfolio is heavily weighted in similar assets or sectors.
• Investors may have to pay fees and expenses associated with REIT investments, which can reduce the net income received from dividends.
• Over-reliance on a specific sector, such as discount retail, can expose investors to sector-specific risks, which may not be mitigated during a market downturn.

Preparing for Extreme Scenarios and Recognizing Fraud

This section details how to prepare for an extreme scenario, as well as the common characteristics financial frauds exhibit.

Stock Essentials and Prepare a Go Bag

Since you can't predict when circumstances will worsen, it pays to be ready for the worst-case possibilities. Although an actual apocalypse is unlikely, being prepared for temporary disruptions, such as a power outage, fire, or flooding, could prove beneficial.

Stockpile Non-perishable Food, Water, Power Sources, and Essentials

Freeman Publications recommends buying items such as a generator to create power during outages. You should also buy foods that don't spoil, such as canned goods and rice, and store drinking water. It's wise to keep a bag on hand with essential items such as a first aid kit, medicine, maps, flashlights, and contact details, as well as having enough cash on hand to last at least a week.

Practical Tips

• Partner with neighbors to create a community bulk-buying club, allowing you to purchase non-perishables in larger quantities at discounted rates. This not only saves money but also fosters a sense of community preparedness and resource-sharing.
• You can enhance your water storage by using natural purifiers like charcoal or sand in your containers to maintain water quality over time. By adding a layer of charcoal or sand at the bottom of your storage container, you create a simple filtration system that can help remove impurities from the water, ensuring it stays clean and fresh for longer periods.
• Develop a maintenance schedule for your new generator by researching the manufacturer's recommendations and setting calendar reminders. Regular maintenance is crucial for ensuring that your generator will work reliably when you need it. Include tasks such as checking oil levels, cleaning or replacing filters, and running the generator at regular intervals to keep it in good working order.
• Practice a monthly "emergency drill" where you simulate a scenario that requires you to use only the items in your essential bag for a set period, like an afternoon or a whole day. This will help you identify any additional items you might need and ensure you're familiar with the use of each item in your bag.
• Use a budgeting app that has a feature to track cash spending and set alerts when you're close to depleting your weekly cash reserve. This will help you stay mindful of your cash on hand and prompt you to replenish it if it dips below a certain threshold. For example, you could set an alert for when you have only two days' worth of cash left, giving you time to withdraw more money without stress.

Beware of Opportunities That Seem Too Good to Be True

The author states that any opportunity that promises consistent outsized returns quickly is either a fraud or is exposing the investor to a level of risk they do not fully comprehend.

Beware Complicated and Opaque Claims of Superior Intelligence

The author explains that the key psychological tactic used by fraudsters is to give the impression that they are smarter than most investors. When you ask them to explain their scheme, be cautious with people who resort to obfuscation and can't clarify the process in layman's terms.

Other Perspectives

• Not all individuals who appear smarter than investors are fraudsters; some may genuinely possess advanced knowledge or expertise in a particular field.
• Some legitimate experts and professionals may use technical language that is inherent to their field, which can be inherently complicated to a layperson.
• The demand for simplicity might discourage innovation and the exploration of sophisticated ideas that cannot be easily explained to a general audience.

Beware of Scams or Ponzi Schemes

Freeman Publications explains that many fraudulent schemes exploit investors' love of quick gains and their desire for immediate gratification.

Comprehend the Difference Between Luck and Genuine Competence

It is crucial to identify whether someone has earned significant wealth thanks to random chance or genuine competence before investing with them. You should be comfortable with the skill set of the manager and confirm that the opportunity they are offering you lies within their area of expertise. You can use the examples of Enron, Bernie Madoff, and Elizabeth Holmes' company Theranos to gain a better understanding of these concepts.

Practical Tips

• Create a "Luck vs. Skill" journal to track and reflect on financial decisions. Whenever you make a financial decision or observe one made by others, jot it down in this journal. Next to each entry, write down whether you believe the outcome was due to luck or skill and why. Over time, this will help you discern patterns and better understand the role of competence in financial success.
• Create a 'red flags' journal to sharpen your critical thinking skills. Whenever you read news stories or case studies about business failures or frauds, jot down any warning signs that were missed or ignored. Over time, this will train you to spot potential issues in your own professional environment and encourage you to ask questions or take action before problems escalate.