Your Bear Market Survival Plan

Well, Jim Cramer finally threw in the towel. On the today show Monday, the Mad Money host and former market manipulating hedge fund manager said:

“I do not want to say these things on TV. Whatever money you may need for the next five years, please take it out of the stock market right now, this week. I do not believe that you should risk those assets in the stock market right now.”

Nevermind that he has been calling bottoms and urging investors to “BUY! BUY! BUY!” throughout the current crisis.

Is Cramer right? If the contrarian nature of his track record holds any weight then now is the time to buy, not sell.

So how do you prepare? How do you prosper in the years ahead?

First of all, if you are a long-term investor you should embrace the opportunities that are before you. Right now, and in the months to come, you will have countless opportunities to buy world-dominating companies at once-in-a-lifetime prices. I’m talking about companies that will be here (and that will be a lot larger) 20 years from now, no matter what happens in the markets or the economy.

Now, here are some suggestions for the money you hold in the stock market. This is no time to ignore proper asset allocation, holding most of your money in the U.S. market or mostly in stocks. Alex Green has written an excellent book, called the Gone Fishin’ Portfolio, which outlines an asset allocation plan that is low cost and low hassle and has proven to out-perform the S&P as well as the vast majority of money managers over the long-term.

Diversify your funds broadly across small cap stocks, large cap stocks, U.S. equities, international equities, emerging markets, real estate investment trusts, precious metals, inflation protected bonds, treasury bonds, high-yield corporate bonds and investment grade corporate bonds. Do this, and you can mostly forget about your long-term money (except for an hour each year when it comes time to re-balance) without worrying about your account blowing up.

Finally, if you’re looking to invest in individual stocks, the coming months will be a great time to pick up world-leading companies at once-in-a-generation prices.

Focus on companies with a sizable barrier to entry. Some investors liken this to a castle with a moat. For example, what would it take for another company to come along and compete with UPS? What would it take to set up a global distribution network, with all the logistics, thousands of trucks and planes, hubs networks, etc.?

While UPS might suffer a bit in the near term due to the economy, high fuel prices, etc… the chances are excellent that it will be a larger company five or ten years from now than it is today.

Also, in times like these (recession and the potential for high inflation) you want to focus on companies that are price leaders and companies with pricing power.

Price Leaders are the companies that compete best on price. When consumers are skimping and saving and looking for a deal, where do they go? McDonalds (MCD)… Wal-Mart (WMT)… Dollar Tree (DLTR), etc. Not surprisingly, all of these stocks are near their all-time highs, despite everything else that is going on in the markets.

Companies with pricing power are ones that can raise their costs to constantly stay ahead of inflation, without eroding their business. Some companies cannot raise their prices without causing a downturn in business. However, companies like Johnson & Johnson (JNJ), Kraft (KFT), Coke (KO), Proctor & Gamble (PG), etc. can bump up their prices to stay ahead of inflation without causing a downturn in their business. If you want a Coke or a box of macaroni and cheese, your going to buy it, whether it is 10% more expensive than it was last year, or not. Owning a share of these companies ensures that your money will continue to grow as these businesses expand, and it will do so at a rate greater than inflation.

Good (and Safe!) Investing in these Turbulent Times,
Jon Herring