A Response to Tom F.

“Beaten with Sticks” was a silly title for a serious subject. I was going to go with “Beaten with (More) Sticks” for this article, but that would be, um, more sillier.

(In addition to being silly, “Beaten with Sticks” was also not a very effective title. Only 6.8% of Wealth Daily readers read it — yes, we track that stuff. A good title will get 9% to 10% to read it. And a great title will hit 12%.)

For comparison’s sake, my previous article, titled “Bear Market?” got an open rate of nearly 11%.

Personally, I liked “Beaten with Sticks” better. But that’s not why I thought about going with “Beaten with (More) Sticks” for today’s title. You see, I wanted to make sure Tom F. opens this email and reads it…

That’s when it hit me: “A Response to Tom F.” has everything that a good title should have. It’s personal, it’s got some intrigue, and it suggests that there will be important information inside…

I bet this article does at least an 11% open rate. After all, aren’t you curious to find out who Tom F. is?

Well, Tom F. is a Wealth Daily reader who sent me an email yesterday. Tom wanted some more info related to my “Beaten with Sticks” article. And I am happy to oblige. (In fact, I wish I got more response to the stuff I write. It’s always nice to know when something resonates, and even more importantly, I like to know what’s on y’alls minds — what you’re worried/curious/excited about.)

So anyway, here’s Tom’s email, followed by my response:

Briton, Great article on “Beaten with Sticks.” Granted it’s hard to read those kinds of warnings and harsh realities, but it’s also nice to see a professional in the financial business be honest with his subscribers and not just say the bull market can go on forever, so thank you for your honesty and warnings.

Based on the article, I have a question for you: What suggestions do you have for investors to protect themselves against the gauntlet? If a bear market is upon us or looming, what are some actions you would recommend to your readers to not “lose it all?” Thanks for any advice you can provide.

Thanks for the comments and question, Tom. This is one reason I love the newsletter biz. I’m not beholden to anything that puts my interests above those of my readers and subscribers. I don’t get paid by companies to tout their stocks, and I don’t run a fund that depends on you having your money at risk (and it is at risk when invested) in order for me to get paid. 

So yeah, I’ll tell you the truth as I see it. Because that’s how I get paid. My Wealth Advisory subscribers pay $99 a year for me to tell them the truth as I see it… The truth about the economy, the truth about the direction of the stock market, and the truth about individual stocks. 

Nobody can be right all the time. But I’m right enough that my opinion is valuable to my subscribers. And my stock recommendations do pretty darn good, too. And they had better. Because if my readers lose money in stocks I recommend, they don’t renew their subscription. Chances are, they might cancel and take advantage of my very liberal refund policy. 

It’s not exactly a fiduciary standard… more like a capitalist/performance standard. But it works about the same. 

Now, enough appetizer. Let’s get to the meat.

Are We Entering a Bear Market?

It’s a big question. And I want to start by stating that I have been relentlessly bullish since around mid-2009. Yes, I was skeptical when stocks turned on March 9 that year, but it didn’t take long to see what was happening. 

I’m not going to recount the action blow by blow, but every time the rally was threatened by European debt or the fiscal cliff or weakening economic data, it was clear to me that the fundamental catalysts for higher stock prices were still in place. 

A good bull market is made of liquidity, economic growth, some healthy skepticism, and some good stories. Liquidity comes from people getting jobs and raises, from assets rising in value, from borrowing, and from monetary policy. We’ve had most of these in place since 2009. 

We had economic growth, too. When you come out of a recession as severe as 2008, economic growth is inevitable. And the fact that growth never accelerated much was a good indicator that the bull market could go on for a long time. 

The PTSD from the financial crisis kept the average American very skeptical of the first five years of the bull market. It wasn’t until 2014 that we saw net inflows into stock mutual funds. 

And we had some great stories, too: The promise of biotech. The domination of Apple and its suppliers. The U.S. oil revolution. The search for yield. Social media and start-ups. We saw huge M&A activity and a ton of new IPOs. 

The point here is you need a reason to buy stocks (the story), you need to have some expectation that there’s upside for revenue (economic growth), valuations need to be attractive (skepticism and sentiment), and you need to have the money to do the buying (liquidity).

As I look around, I see more threats to these bull market catalysts than I’ve seen in a while. There are still some good stories out there, but not as many.

There’s the same old 2.5% growth in the U.S., but it’s weakening everywhere else. Valuations aren’t exactly attractive (though the majority of stocks are not what I’d call expensive). And we’re losing liquidity from the Fed, from the Chinese stock market crash, from the breadth problem in U.S. stocks, from weakening emerging markets (Brazil, Malaysia, South Korea, Peru, etc.), from commodity-driven economies, etc. 

Are we entering a bear market? I don’t know. You typically need a U.S. recession for a full-on bear market. And it usually takes some kind of economic shock to start a recession.

So it’s probably more reasonable to discuss what to do in case of a severe correction… 

A Simple Plan

Let me start this by saying you’re not going to “lose it all.” I know that was a figure of speech, but language we use is important. The difference between saying a bear market/correction is a money-losing event and saying it’s an opportunity to buy Starbucks at $40 matters. 

Now, let me run through a few things you can do, in no particular order:

Portfolio Review: Check out your stocks. Which ones do you still want to own long term if they are 20% cheaper? Which companies might have funding issues? Which companies have a lot of international exposure? You might consider taking a little off the table to have some cash available to do some bargain buying, especially in regards to losing investments. If a stock is down now, a correction is not going to help.

Raise Cash for Bargain Shopping: Can you put aside a little extra in order to buy stocks at a discount? You can also raise cash by taking some profits and exiting losers, as I just mentioned. Also, look into how to sell covered call options on the stocks you own. Covered calls are a good way to raise cash in a correction without selling your stocks. A couple successful covered call sales could raise 10% of your cost basis in free cash that you can then use to bargain shop. 

Don’t Panic: Most bear market/corrections are not going to be like the financial crisis of 2008-9. 50%-plus declines for the S&P 500 are once-in-a-lifetime events. If the market sells off 15%, you sell everything, and then it rallies… what then? You’re kind of screwed. Better to stay the course and make small changes. How many times have we heard “Oh, this is the big one” over the last few years, only to see stocks move higher?  

Make a Shopping List: Make a list of stocks you’d like to own, but at cheaper prices — Starbucks, Bank of America, Netflix, etc. Sell-offs are a lot easier to stomach when you have buying goals. 

Do Some Technical Analysis: I know this may sound daunting, but check out a five-year chart of the S&P 500. Get a handle on what a 10%, 15%, and 20% drop would look like. It doesn’t have to take long. But it will give you an idea of where buying points might occur. 

Learn How Bear Markets Behave: Bear markets are different than corrections. Bear markets will grind every last ounce of optimism out of you. Look at the gold market. It’s been in a bear market for three years now. How many times have people called bottom? How many times have prices rallied a bit and then been smacked lower? It’s been horrible. And if liquidity dries up, the gold bear will get worse. (For this reason, I find it hard to believe a true bear market is at hand, at least for U.S. stocks.) Also, you should have an idea of what “capitulation” means. 

Read Wealth Daily: Just kidding on this one, sort of. While you can bet the editors at Wealth Daily will always do our best to keep you informed, there are a lot of really smart people out there writing about the market these days. Read them. Take in as much as you can, filter out the most extreme opinions, and you’ll probably be left with some pretty good commentary on what’s happening. 

OK, I’ve already gone pretty long today. My stoic copy editor Brianna is gonna be miffed (in no small part because I missed my 3 p.m. deadline by, oh, six-and-a-half hours). Sorry, Brianna. And Tom, let me know if you have any more questions/comments, if this 1,600-word response hasn’t already scared you off. 

Until next time,

Until next time,

Briton Ryle

@BritonRyle on Twitter

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.