We are in a Bear Market

I can sleep well when I love the bear – bear market that is!

A bear market is a time when investments have fallen at least 20% from a recent market high. The closing price of the S&P 500 index that tracks the prices of 500 large publicly traded US companies, is often the gauge to see if the US stock market is in bear-market territory. Another telling index is the NASDAQ. Using either index we are in bear territory.

This downward trajectory makes many investors run because they lose hope. Part of the real problem is that, during a bull market, just about everyone is doing just fine. When the bottom drops out, and prices fall, most assets lose value. The long-term investor continues to have a long-term perspective, not just a bull market perspective or a bear market perspective.

A bull market hides a multitude of investment sins giving investors the impression they can’t lose. Failure, however, is a great teacher. In a way, acquiring battle scars is like acquiring immunity from making the same mistake twice, serving as a booster shot for future returns.” Jake Rosser, Coho Capital Management

The Bear Market is A Special Gift

I want to give the bear market a hug! I actually hope it lasts at least until 2023. The reason is manifold, but in this first hug the bear issue, I want to talk about what I do with dividends. Generally speaking, dividends don’t disappear in a bear market. My experience is quite the contrary. For the most part, most companies with a wise dividend policy will continue to pay the dividend and may increase it even when the bear is growling.

One thing a farmer knows is how many acres of land he owns. The value of 100 acres might change in the sense that he might get $10,000 per acre for the land if he sold it today. A year from now he might only be able to sell the same acreage for $8,000 per acre. However, the farmer still has 100 acres. If the farmer was planting corn, and the crop still had value, he is getting a crop he can sell each year, regardless of the market price of the land.

If I have more land I can gain a bigger harvest if I am patient.

If the farmer is planting a good crop, then the value of the land on any given day really doesn’t matter. What matters far more is the food he grows and the potential to grow another crop the next year.

One Hundred Shares

Now, turn your thinking to your investments. If you own 100 shares of a company’s stock or 100 shares of a diversified ETF, you have a field of “100 shares.” When there is a bear market, other farmers don’t want to buy your field of shares unless you give them a great deal. Other farmers panic and sell their farms (shares).

As a dividend-focused farmer, I am smiling!

I’d like to own more of the other farmer’s land, so I take my incoming dividends and buy a couple more “acres” to add to my existing ownership. This means I can gain more crops, in the form of dividends, to buy more shares from other frightened farmers.

Reinvesting Dividends

So the reason I love the bear is that I can add acres at a lower price. Those acres can yield more income. That additional income can be used to buy even more shares. Lower prices, of quality acreage, is an opportunity for stock farmers who see the future more than they see the present.