How To Make Money In This Bear Market

Source: Dr. Tran BioSci

Summary

• Since September, all three key market indices (XBI, IBB, and DJI) are trading on a downtrend.
• The stock market cycle usually occurs in advance of the economic cycle.
• The current market hiccup is growing stronger by the day thereby, providing more evidence of an incoming bear market and a recession.
• The undisciplined and uninformed investors can suffer catastrophic losses and thereby quit investment altogether.
• Being patience and opportunistic can lead to substantial wealth creation at the turn of the next bull market.

"Beta and modern portfolio theory and the like - none of it makes any sense to me.

We’re trying to buy businesses with sustainable competitive advantages at a low, or even a fair, price."

- Charlie Munger 

Since September 2018, it is not far from the truth that we are entering into an aggressive bear market that can potentially transition into a full-blown recession. Most of the major stock market indices are trading southbound. In the past three months, the Dow Jones Industrial Average (DJI), SPDR S&P Biotech ETF (XBI), and iShares Nasdaq Biotechnology ETF (IBB) exchanged hands lower by 17% at $83.24, 11% at $108.50, and 4% at 25635.01, respectively.

Figure 1: Key market benchmarks (Source: Yahoo Finance)

It’s difficult to pinpoint the exact causality that brought market bears out of the woodwork. Nevertheless, it is likely that the looming fear of a Global Trade War might be the culprit. Another possibility is the interest rate hike by the Fed. To add further injury to the insult, there are concerns regarding the rising dollar. With our interconnected economy, global trade is a key revenue driver for the U.S. Due to a stronger dollar, global trade will suffer which will reduce our gross domestic product ("GDP"). Amidst the panic on Wall Street, we’ll explore strategies for you to in this educational series article.

As follow, we believe that there is no better teacher than experience because his or her lessons are more powerful than any books. That being said, we entered the financial market in 2007 when we were still in our postgraduate education. Our first stock, Darden Restaurants (NYSE:DRI) worked out very well. Nevertheless, the 2008 Great Recession started to hit the market with nearly all financial stocks suffering a meltdown.

That financial crisis all started with subprime lending, in which banks and financial institutions offered mortgage loans to people who were unable to pay it back. Mortgage loans were bundled into a financial instrument known as mortgage-backed security ("MBS") and marketed to investors. As homeowners struggled to pay their mortgage, houses went into foreclosure "en masse." As these toxic loans weighted heavily on the balance sheet of financial institutions, MBS lost most of all their value and the rest is history.

During this crisis, Buffett’s wisdom resonated most strongly in our mind. Per the Oracle of Omaha, "Be greedy when others are fearful and be fearful when others are greedy." As we researched Buffett, we also read the works of other gurus, including Benjamin Graham, John Templeton, Philip Fisher, George Soros, Charlie Munger, and Mohnish Pabrai. After countless hours of self-education, a common theme emerged: there is a huge opportunity for substantial profits amidst the difficulty of the 2008 Great Recession. Notably, this first major event gave birth to our new investment philosophy, Integrated BioSci Investing. It is a fusion of accumulated wisdom from various Founding Fathers that are distilled specifically for the life science industry.

In the coming months, we reread The Intelligent Investor from Buffett’s teacher (Benjamin Graham), and we are convinced that the aforesaid recession is only temporary. Despite that we do not know when it will conclude, we were certain that it is not a matter of "if" but "when" there will be another bull market. History has repetitively shown that the financial market follows a cyclical pattern of boom and bust. George Soros eloquently elucidated this concept in his book, "The Alchemy of Finance" through his analogy of market bubbles. And as we explicated, the bubble that led to the 2008 catastrophe was subprime lending.

Since the financial stocks experienced the most depreciation, we reasoned that they should rebound most vigorously at the subsequent bull market. To ascertain our thesis, we conducted our deep-dive research. And, we became convinced that the various government stimulus packages should help major financial institutions deal with their toxic loans. Else, America won’t be able to function without the major financial institutions. People will always need to go to the bank. Thereafter, we build shares in several financial stocks - like Bank of America (NYSE:BAC), Genworth Financial (NYSE:GNW), and Goldman Sachs (NYSE:GS) - which paid off handsomely. Nearly all investments that we purchased near the end of 2008 became multi-fold winners.

Notably, there is a recession every five years on average. Interestingly, we’re now a decade into the last bull market. And, stocks are now heading southbound faster by the days. In this market downturn, the bioscience stocks have been dropping the fastest instead of the financial equities. As a rule-of-thumb, smaller firms enjoy more robust growth and thereby experiences the sharpest decline in a bear market. Conversely, they will appreciate the most in a bull market. Peter Lynch presented the aforesaid phenomenon in his book, "One Up On Wall Street." Hence, it is highly likely that Lynch’s wisdom explained why the ultra performer XBI, an ETF of small-caps bioscience stocks, is suffering the most market decline.

Figure 2: Various bull markets (Source: FINRA)

Instead of following the herd and being fretful, we realized that this bear market is a highly opportunistic time. Many bioscience equities are now on sales at deep bargains. And, they can be gold mines for the opportunistic IBI investors. Therefore, we will increase our research efforts in picking out a focused group of companies that have the most promising molecules, sizeable therapeutic market, strong balance sheet, excellent management: we will build shares when Wall Street taps out.

It is worthwhile to note that not even Buffett can forecast with certainty how long a recession will last. As a result, a prudent strategy is to build shares in a stepwise fashion. We recommend that you purchase strong bioscience stocks like Regenxbio (NASDAQ:RGNX) on a monthly or bimonthly basis or on days when they suffer the most decline. Of note, a huge depreciation usually occurs when an institution disposes their ownership.

In accumulating your stakes with discipline and devoid of emotion, you’ll end up with an overall lower average cost. Moreover, we encourage you to exercise diversification because bioscience stocks are differentiated beasts: the success rate of a molecule from bench research to commercialization is quite low. By increasing the number of companies (and molecules) that you invest, there is a higher chance that you’ll find with a company with a blockbuster (a medicine that generates at least $1B in annual revenues).

For young investors who have limited cash, it’s best to wait until there is more blood on Wall Street before buying shares. This strategy is analogous to waiting for the best time to deliver a knockout punch. That is what we’ll use for our portfolio. The risk to this technique is that the market might rebound sooner than one’s expectation, thus causing you to miss out on this golden opportunity to invest.

Final Remarks

For investors who purchased stocks at their highs and are experiencing losses, those are only temporary "paper losses" if the companies that you bought are of high-quality. According to Fisher, 91% of the time the market value of a good company will eventually match its true worth. And, it can take from months to five years for the market and intrinsic value to be merged. That being said, your temporary loser stocks will become winner equities in the future if you are patient and have a long-term outlook to investing.

The other point is that you have to be able to appraise how much the company is worth. This way, you’ll know if what you are going to purchase is on sales at a bargain. Sometimes Buffett and Munger would research many companies that they want to buy and then wait for the opportunistic time to accumulate their stakes. Interestingly, we noticed that Berkshire Hathaway (NYSE:BRK) is accumulating more shares in the recent months. And, the 40% cash position that we recommended you to hold in your portfolio is now going to become more handy by the days. Last but not least, we’ll finish this article with Mohnish Pabrai's quote, "You don't make money by buying and selling but by waiting."

Analyst Certification

Dr. Hung V. Tran, M.D., M.S., C.N.P.R. is the Founder of Dr. Tran BioSci, Integrated BioSci Investing, and BioSci Capital Partners. As the Chief Medical Analyst, Dr. Tran pioneers a novel investment philosophy (Integrated BioSci Investing), a fusion of value and growth investing that are specifically adapted for bioscience business analysis. We leverage on Dr. Tran’s unique medical, scientific, and market expertise to deliver an unprecedented accuracy in clinical trial forecasting and in finding alpha bioscience investments. In our first year of operations, Integrated BioSci Investing is now adopted by a community of hundreds of stellar investors and nearly 20 thousand readers. Asides from everyday investors, institutions also seek our research and consulting.

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