A short list of what to have in a down market.

posted by mark on Thu, 05/12/2022 - 10:33

Margin of Safety - This means owning a security way under the current market’s price. For example, if you own Apple at $20 and the price drops down $30 from $141, you are still very far ahead. It dropped to $111, but you have a cushion of $91 (111-20). That is a margin of safety. If you own it at $141, you are “in the hole” $30! Paying too much in investing is a cardinal sin.
Companies with Earnings and solid fundamentals – Lots of companies were IPO’ed in the last several years with no earnings (but great stories!). Revenues are one indication of a company’s progress, but bringing those revenues down to the bottom line (earnings) through cost control is essential to support their stock prices long term. Many were losing lots of money and the trend in earnings was negative. Their prices have dropped significantly from their high prices, some as much as 90%. Examples are MSTR, CHWY, PTON, BYND, UBER, DOCU, LYFT and DASH. Just because people love a company’s product, doesn’t make it a good investment.
Cash – It’s always good to have cash should the market turn down and stay down for a long while – think 3 years or more. You don’t want to HAVE to liquidate investments in a severely down market. That converts paper losses to REAL losses. Furthermore, if you want to seek out “sales” on investments, cash is king. Buffett is the master of this!
Mental attitude – Can you live with the market being down 30%, 40% or 50% for several years and still keep cool headed? It is critical to understand many aspects of behavioral finance, as well as your ability to withstand temporary adversity.
Don’t buy more just because an investment is down – Make sure the “story” is backed by strong fundaments. Nothing from nothing is nothing. Every investment has a story, but the story has to have substance, not just hope! Hope is not a strategy.