Will you be naked?

I love and admire Buffett! He is not only the smartest man in investing but also a very humorous one with a lot of wisdoms. Here is one that I like very much: “Only when the tide goes out do you discover who’s being swimming naked”. What a great humor to educate us how to differentiate good stocks from bad!

We have enjoyed a decade long bull market with very little and infrequent corrections all along. For those who have only started investing since 10 years ago, they probably won’t have any idea about what a bear market will look like and how stocks will perform during bad days. From time to time I have seen people bragging how great they are doing and how they can always make money in the stock market. Indeed, this is the10 years of time when most people in the market can brag with confidence. But our life will be much longer than 10 years and any bull market will come to its end at some point. If you only believe and enjoy good days with stocks, then you may suffer terribly during bad days. While I’m not saying it is imminent that we are going to a bear market, I think we are close enough to be prepared for it. And I even think the next bear market, which may be 1-2 years from now, will be a long lasting one in a scale most of people cannot even imagine now! If you think the last 2 months are painful enough for you, then you are definitely not yet well prepared for a truly bear market. What we just experienced was really nothing and just a kindergarten play compared to what will be coming in the next few years. Be prepared!

So how to prepare yourself for a bear market? I have talked a lot about strategies lately even including the whole life insurance as my personal ultimate plan for a long lasting bear market. But inevitably for most of us, we still have to deal with stocks in our portfolio during good or bad days. That’s why Buffett’s humor on how to identify naked stocks is really a great wisdom that all of us need to remember deeply! So what he really means here? Well, it is simple and logic: stocks can generally do well during good days regardless of their fundamentals and you cannot easily identify the bad apples during a strong bull market. Only during bad days like a bear market, then you can easily find out which ones are really bad and will perform terribly. It is no secret one sector has performed extremely well in the past 10 years, the tech stocks, especially the so-called FANNG stocks, Be clear, I’m not saying the tech stocks are bad as a whole. Actually many of them are truly gems with great potentials. But the problem I’m seeing is the euphoria built up for such high growth stocks that has pushed them into unbelievably high expectations that can hardly be supported by the fundamentals on a sustainable basis. You won’t see much concerns during good days as everything can go up with the tide. But if a bear market truly hits, those hyped stocks will suffer the most and drop first and fast. We have got the first taste in the past few weeks that those highly chased up tech stocks are declining more during the correction. But those stocks quietly moving up based on their sound fundamentals are faring much better during corrections. They will also be the best ones to hold during a bear market as they won’t be naked! That’s why I’m such a big fan of investing in dividend growth stocks for long term, which will be the best ones to hold and doing fine during bear markets.

No surprise, one such stock is my beloved Microsoft (MSFT)! Long time readers certainly know very well my love in Microsoft. I first started to taking about buying it was back in 2010 (see here). I have always advised to buy MSFT at dip and the most recent substantial plunge for MSFT was about 2 years ago (see here). Since then, MSFT has almost doubled. I guess you are tired of my constantly talking about MSFT but you better hear me saying this again: If all the stocks can go naked during the terrible bear market, Microsoft is likely the only few that will stand firmly and covered with beautiful clothes. I have been very lonely in promoting MSFT over years but not anymore. It appears Wall Street, which is usually short-sighted and slow in understanding good value stocks, is finally wakening up. Here is the latest bold call on MSFT: How Microsoft Could Reach $1 Trillion in Stock Market Value. I think it is not if but when this will happen. While it is great to see the booming businesses for MSFT that will inevitably be translated to higher prices, I really hope MSFT can stay low forever for my long term holding of it as it will much fast accelerate my millions of dollar profit goal from my dividend reinvestment in it. Therefore I do have very mixed feelings about any good news about MSFT.

Be aware, I’m not talking about anything short term here. If you only care about what may happen in the next few months, don’t bother to pay attention to this. But if you are serious about your long term financial health, then you need to be very careful with what is going to happen in the next few years and you need to take appropriate actions to safeguard yourself now and immediately. Why? The market will not tell you exactly when it will start its bear market and you won’t get a switch on/off type of pre-warning. Creating and maintaining a long term portfolio with quality stocks having reasonable valuation is a time-consuming process and it will be too late when the next bear market actually strikes. My strategy for my long term investment is something that can survive well in all weather conditions. As I said I’m very convinced that we will go into a long lasting bear market in not too far future and we probably only have 1-2 years at most before we start to feel it. But I could be wrong and no such bear market may ever happen in my lifetime. The beauty of my strategy is that I will gain greatly if I’m wrong and can also survive very well if I’m right. The best approach for such an all-weather proof strategy is not those high flying fancy growth stocks as most of them will suddenly become naked when the tide recedes. Rather the best strategy is to find quality value stocks with long term track records of paying increasing dividends and buy and hold with dividend reinvestment. When this is done, you can simply forget about them and sleep soundly as the long term DRIP compounding magic will surprise you in 15-20 years with a great wealth created for you without you knowing it. Basically what you are doing with this is just like you are acting as a business owner for good companies.

So folks, for your long term financial health, always ask yourself: will you be naked when the tide goes down?