The Bear Market Playbook

With the recent sustained market sell-off, investor sentiment has undeniably turned negative.

Multiple converging crises have many feelings bearish about investing. While this protracted downturn is certainly concerning, it's far from the first bout of volatility I’ve experienced over our investing journey since 2011.

 Years ago, I attended a talk by famed investor, Richard Lawrence of Overlook Investments.  

He talked about the concept of a "Bear Market Playbook" that Overlook had developed after going through the Asian Financial Crisis in 1997.  

They would return to this playbook during periods of market distress. 

I've adopted this in my own investing framework. 

Having such a playbook allows us to maintain our cool and capitalise on dislocations when others are giving in to panic.

The playbook is based on time-tested core investment principles that have worked countless times before. 

It's important to note that periodic market declines are a normal part of the stock market.  

However, what makes this downturn uniquely challenging is that bonds are also falling in tandem as interest rates rise sharply (more on this crucial topic in future newsletters).  

So, what should our game plan be? If you're still in your prime earning years, I would use the downturn as an opportunity to steadily increase monthly investments. 

However, be sure you have a robust emergency fund of at least 3-6 months constructed and avoid the use of leverage.

Exercise extra caution if your industry is poised to see outsized impacts from a slowing economy.   

For those nearing retirement or already retired, a prudent step is to thoroughly review your holdings to assess the financial health and future business prospects of each company in your portfolio.  

Trim positions in weaker names that have concerning financials or outlooks and redeploy that capital into high-quality stocks that you have strong conviction in for the long-term.  

This is difficult emotionally, but crucial.

You must be ruthless in doing this. 

You must avoid the trap of sunk costs and clinging to losing positions if your thesis is invalidated. 

When analysing individual stocks during volatile bear markets, the key factors I prioritize are seeking out companies with positive cash flows, strong balance sheets, and minimal leverage.  

Highly leveraged firms with negative cash flows and precarious financial positions will suffer the most in severe economic downturns.

How about Singapore REITS?

I also like to talk about  S-REITs given their popularity in investor's portfolios. 

It's important to note that they are operating in a vastly different landscape compared to pre-2022.  

There is a limit to the usefulness of historical charts and financial metrics as the easy monetary landscape from 2008 to 2021 that allowed S-REITs to thrive has ended. 

Its crucial not to chase yield but to also consider the risks carefully, especially regarding how sustainable distributions are. 

Examples like Suntec REIT and OUE Commercial REIT have concerningly low interest coverage ratios that provide little buffer against the impact of rising rates.  

I would only focus on S-REITs with that have strong financial positions, prudent capital structures, and strong sponsors.  

In the eternal words of Jamie Dimon, I want any companies we invest in to have "fortress balance sheets" to navigate any financial storm.

In a recent interview, he admonished investors to be ready for 7% interest rates.

I would heed his advice.

By keeping a steady hand, we can not only survive but seize opportunities in bear markets by staying rational, optimistic, and vigilant. 

We've successfully overcome market downturns before and will do so again.