Simple investing strategies that help you survive and profit in a bear market - part 1 of 3

If you follow the markets as closely as I do for the past few weeks, you'd realize that both The Dow and TSX plunged into bear markets due to two black swan events happening simultaneously: COVID-19 and Russia-Saudi Arabia oil price war, is it a sign that a recession is coming? Maybe, but I think it's not the time to panic, instead you should come up with a game plan as every bear market presents wonderful life-changing buying opportunities! This is the first of a series of three articles talking about how to use different strategies to survive and profit in a bear market.

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In this post, we focus primarily on a simple quantitative strategy.

Theory: Magnitude of declines of present days is similar to that of the past.

Applies to: Most dividend aristocrats and blue chip stocks

Say during the 2008 Financial Crisis, blue chip stock ABC went down 60% from the peak but recovered in the following years. For any future declines as of 2008, the likelihood of ABC rebounding is increasing as it gets close to -60%, so in this case, I think it's safe to start buying as of 45% decline from the peak (which is 75% buy level, I will explain later), and you keep on adding more to the existing position in a systematic way as the price goes down.

To demonstrate how this theory works in reality, I use a TSX dividend aristocrat Fortis(TSX:FTS)(NYSE:FTS) as an example.

Above table shows Fortis' declines above 15% for the past 20 years along with their duration, its biggest decline was 30.86% and it occurred during the 2008 Financial Crisis. You can also find buy level informations at the bottom of the table. For example, 75% buy level is the same as 0.75 of the biggest historical decline of 30.86%, which equals to 23.15% drop, and after this magnitude of decline from Fortis' recent high (C$59.28), the price is at C$45.58, the same principle applies to all the other buy levels.

Based on the history, Fortis usually recovered after having 18.29% to 30.86% declines. It's hard to say where it's gonna stop exactly this time, but due to worldwide panic and fear of COVID-19, I'd say it's safe to assume that this time the drop will be closer to 30.86% than 18.29%. If you're new to investing, you can stick to the system and start taking a small position at 75% buy level, adding more at 87.5% buy level and ultimately having a full position at 100% level. If you have invested before, you can modify the system, so instead of initiating a position at 75% buy level, you could do it between 75% - 85% buy levels, and adding more as the price goes down.

But you might ask, what if Fortis drops more than 30.86% this time? Well, in the unlikely event that it happens, you can consider adding more to the existing position for every 4% drop (roughly every 12.5% buy level) given the underlying fundamentals stay intact. Furthermore, I think you should take this hypothetical scenario very seriously as it presents a tremendous opportunity for the following reasons (assuming underlying fundamentals stay intact):

1. Fortis tanked 30.86% during the 2008 Financial Crisis and recovered, so it should too this time even with a bigger decline.

2. More than 30.86% decline never happened in the history of the stock, usually biggest gains happened after biggest declines(take a look at Dow Jones in the past few weeks)

3. We've been using similar concepts in one of our core strategies in buying stocks at the bottom for the past 2 years, it worked like a charm.

By using this simple strategy, I believe that you would be able to take positions at an attractive price while not exposing yourself to too much downside risks.

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What if you feel like this strategy is too simple and you don't feel assured? Don't you worry, in the next blog post, I will write about another simple strategy that you can use that's based on fundamental analysis.