Daily Update: Lock In Bear Market Winners As Earnings Season Looms

Leon Cooperman spent a quarter century at Goldman Sachs. He knows strategy better than a lot of people now on Wall Street. But there’s a fatal flaw in his current advice for investors worried about a bear market ahead.

Cooperman points out that there are no real winners in a steep market downturn. Victory is relative . . . “the person who loses least wins.”

That’s great if you’re on the Goldman Sachs trading desk trying to keep $1 trillion flowing across all the sweetest spots on Wall Street. However, measuring success by losses requires you to lock those losses in.

Until you give up on a stock and sell out, any losses are only there on the screen. They only became real when you cash out.

And the only reason to cash out in a down market is if you need the cash. Big companies like Goldman Sachs and hedge fund operators like Leon Cooperman do it because they need to pay overhead.

Small investors also need to pay the bills, but with the right portfolio structure you won’t have to liquidate quite so many shares to stay solvent. Instead, the biggest pressure on our end of the market is psychological.

We sell into weakness because we lose faith and focus. We think we’ll never get a better exit. At that moment, theoretical losses become real . . . and it’s usually our own fault.

Of course patience has a limit. I’m reminded of how mighty Amazon (AMZN) took eight years to recover its dot-com peak, right in time to spend another two years reeling in the 2008 crash.

That’s a lost decade. And it probably reflects the longest period of time any investor will tolerate dead money before liquidating in order to get moving again.

Someone who bought AMZN at the dot-com peak and sold in the lost decade would have locked in a loss. Someone who resisted the urge to sell would be looking at a 17% compound annual return over the total holding period . . . triple the S&P 500 and more than double the NASDAQ.

Maybe those long-term Bezos bulls sold a few shares along the way to lock in a profit. In that scenario, they’re ahead of the Cooperman curve.

They’ve not simply taken a smaller loss than the rest of us. They’ve captured a lot of real wealth.

Every $1 stuck in AMZN in that lost decade is worth over $32 today. That’s a true win.

I admit, a decade is a long time to grind your teeth in between bull markets. That’s why I focus on significantly shorter timelines that don’t require superhuman patience.

And if you’re more like Leon Cooperman and trying to get out of the bear’s way, I have to say you should be liquid now. The NASDAQ hasn’t hit any records since November and while the S&P 500 has avoided technical bear market levels, it’s been a frustrating year there, too.

Most bear markets play out in about 10 months, counting the recovery phase. If you have enough cash on hand (or coming in) to last that long, the question of whether to liquidate into weakness may not even come up.

The Bottom Line

With enough cash coming in, you’re one up on Leon Cooperman . . . you can have complete control over your exit because there’s no external force pushing you to sell your shares at a loss.

Granted, it can take a lot of hard work to get that much cash flowing. But every inch in that direction buys you incremental freedom to hold on when the market has depressed the value of your portfolio.

After all, every loss you realize is locked in. It can’t recover. Done is done. All you can do at that point is buy back in and try again.

That’s why the real money on Wall Street avoids selling great stocks without good reason. The best way to win at Cooperman’s game is not to play at all . . . only sell when you feel good about the exit.

And that’s why Wall Street loves dividend stocks for the long term. Buy these companies at the right price and you’ll never have to even think about selling.

If you’re making “enough” money every quarter, you’re not thinking about selling and the stock price is only  theoretically interesting as a gauge of what you’re leaving to your heirs.

Consider: a portfolio that pays an overall 4% yield will make the retirement “number” without forcing you to sell a single share. That’s how simple the math gets.

These companies are unlikely to deliver a long-term return anywhere near AMZN, which has yet to authorize a single penny in dividends unlike big-tech rivals Apple (AAPL) and Microsoft (MSFT).

Dividends are a slower ride. But they’re usually a safer and more sedate ride as well. The upswings are smaller. The downswings are less scary.

With enough dividends coming in, you won’t even notice a bear market underway. The payouts don’t need to last forever, either. If a bear market drags on for 10 months, that’s three quarterly distributions to your account.

And that goes a long way toward buying your patience even if a downswing drags on for years. One reason MSFT recovered faster than AMZN in the dot-com crash is that it started paying cash back to shareholders back in 2003.

Stocks like that are in high demand right now because they offer a little peace and quiet when the market looks like it’s going to turn stormy.

There are plenty of names on the S&P 500 right now that are still trading within sight of record levels. As far as they’re concerned, the bull market never ended.

Over 90% of them pay dividends. These are the ultimate winners in any bear market cycle.

They don’t want you to sell . . . ever. Keep buying whenever you can increase your yield and you won’t have to.