Thoughts on navigating a bear market.

Thought I would share some hard won lessons from 2000–2001 and 2008–2009.

1) Look at balance sheets first. Leverage matters. Learn the DDIS function on Bloomberg and look at covenants. CDS is manipulated in bear markets so is less meaningful; i.e. aggressive funds will short the stock and then buy the CDS to drive it up and scare equity investors. 3x debt to EBITDA was a bright line in the last downturn and one did not want to be above it.

2) Most stocks will trade on GAAP P/E multiples, FCF multiples and dividend yields. EV/S doesn’t work well in bear markets as there is not a floor valuation for stocks valued on EV/S. The bid from private equity for technology assets *may* change this somewhat this cycle.

3) Liquidity matters although this cuts both ways. Being effectively unable to sell some of my more aggressive positions where I was a large holder actually saved my performance in 2009.

4) Stocks will bottom long before fundamentals — as always.

5) Generally pays to panic early or double down late. We are well past the “panic early” point. But either way, important to remember that the bear market will end. It pays to be optimistic over the long term. The United States survived the Great Depression and two World Wars. It will survive the Coronavirus.

6) Management teams have no idea what is going on. All companies will miss numbers and lower guidance. Tough for the market to bottom until companies really begin cutting numbers and the market has more certainty on fundamentals. It will likely take companies another few weeks from today, March 12, 2020 to understand the impact and give guidance.

7) Management teams that cut expenses first are advantaged as it is an area under the curve problem. The earlier the cuts, the less deep they have to be and the better positioned the company is for the recovery. Bad management teams cut late and deep, which leads to them really suffering in the upturn.

8) Everything gets shot and defense gets shot last. More aggressive stocks beginning to outperform the market means we are near a bottom.

9) Not a lesson, but a prediction: the bailouts this time will be much less equity friendly than the 2008–2009 bailouts.

10) Alternative data will be a difference as the market will have much more of a “real time” read than it did in 2008–2009.