Opinion: “The stock market is not going to zero”: How this individual investor with 70 years of experience negotiates the bear market

There are not many investors who can claim a successful life in the stock market. Warren Buffett of Berkshire Hathaway BRK.A,
-1.94%

BRK.B,
-1.39%
comes to mind, of course, but what about Warren Kaplan?

WHERE? Kaplan is an 85-year-old individual investor with 70 years of stock market experience. Kaplan grew up in a poor family in the Bronx, New York, but by following four simple stock market strategies through bull and bear markets, he built a comfortable life for himself and his family.

With so much confusion and instability in the financial markets right now, it seemed like the right time to meet Kaplan, who lives in Altamonte Springs, Florida and still manages his family’s investments. Here are four strategies Kaplan used to succeed that any investor can copy:

Buy Dividend Aristocrats: There is nothing that Kaplan loves more than buying shares that pay dividends, especially the “Dividend Aristocrats”. These are companies that have raised dividends for at least 25 consecutive years. “Paying a substantial dividend of at least 3% or 4%,” says Kaplan, “shows that the board understands its responsibility to shareholders compared to companies that do not pay dividends and instead pay huge salaries to executives.”

Before buying an individual stock, Kaplan first looks at the stock P / E ratio, dividend and dividend history. “I want a company that is really committed to increasing its dividends,” he says. “I have not been interested in the last three years, but if the company increases its dividend for several years, it means something to me. This is a stock that I will put on my watch list. You have to be patient and expect to buy at a price that represents good value. ”

Shares Kaplan liked for their dividend include the Walgreens Boots Alliance WBA,
-0.20%
and AT&T T,
-1.57%.
However, he says, “getting the right price is more important than anything else.” He admits that it is often a challenge to know when to buy.

Kaplan suggests investors start by buying a small number of Aristocrat shares. “Instead of buying 100 shares of a $ 40 stock, buy 10 shares for $ 400. “I’m still doing that.”

2: Buy ETFs that pay dividends: Kaplan buys ETFs that pay dividends (negotiable mutual funds) that investment researcher Morningstar rates three, four or five stars. Kaplan likes ETFs include the ProShares S&P 500 Dividend Aristocrats ETF NOBL,
-0.88%,
Dividend SPDR S&P ETF SDY,
-0.96%,
ProShares S&P Technology Dividend Aristocrats ETF TDV,
+ 0.75%
and ProShares Russell US Dividend Growers ETF TMDV,
-1.26%.
It also favors technology companies that have increased their dividends for at least the past seven years. Shares such as IBM IBM,
+ 0.45%
Cisco Systems CSCO,
-0.76%,
Apple AAPL,
+ 0.67%
and Microsoft MSFT,
+ 0.92%
meets its criteria nowadays.

3: Buy and keep (but not forever): Unlike many investors who buy and hold indefinitely, Kaplan holds shares until the market environment changes. This catalyst could be a change of management, a dividend cut, a technical weakness, poor profits or an overstatement. If any of these scenarios occur, Kaplan could reduce his stake or sell all his shares. .

4: Sale of covered call options: Kaplan regularly sells covered calls on his dividend-paying shares. Selling covered calls creates a premium and allows him to sell shares at a price he sets. After the stock is automatically sold (according to the selection rules, it is “called”), Kaplan waits for a lower price and buys the stock back. He then sells another covered call.

“It never bothers me when a stock I sell moves higher and is withdrawn. I can always buy it back if I want. “

Kaplan explains why he likes this strategy: “Selling covered calls is one of the most effective ways for me to continue earning money while earning money as my stock grows. It never bothers me when a stock I sell moves higher and is withdrawn. I can always buy it back if I want to. ”

Kaplan sums it up: “I can start by buying six shares of an Aristocrat share, and if it falls lower, I can buy another eight or nine shares. Once I collect 100 shares, I sell covered call options on it. I use buying options to sell. It eliminates the stress of selling. ”

He gives a more specific example: “If a share I hold is at $ 38, I can sell calls at $ 45 with an expiration date of one to two months. I do not care about the size of the premium. “Sometimes I get a few cents, sometimes more.” Occasionally sells covered calls with an expiration date of one to two weeks, but usually chooses one month.

Kaplan’s philosophy is that he prefers to make a premium of a few pennies rather than make nothing (or perhaps lose money on more lucrative strategies). These pens accumulate over time.

“When you sell a covered call,” says Kaplan, “you get paid right away. I like. I am also happy to keep the stock, and if it is withdrawn, I will be happy to sell it and try to buy it again at a lower price. “Anyway, it works out for me.”

How to handle bear markets

Kaplan likes falling markets – including bear markets. This gives him the opportunity to buy his favorite shares at bargain prices. “I’m looking forward to a bear market,” he says. “I will place a Good til Cancelled (GTC) order on shares I want to buy at lower prices. For example, I can buy 10-, 15- or 20-shares, depending on the share price. “

Usually, these orders are in Kaplan’s “black swan” portfolio. Here he tries to buy shares at extremely low prices in case of a worst case scenario (ie crash). For example, it recently introduced a small GTC order to buy Hormel Foods HRL,
-0.24%
at $ 39.99 per share (closed on June 14 at approximately $ 45 per share).

Kaplan has other suggestions for what to do in low markets. “I have more than my normal cash position during a bear market,” he says. “The lower the share price, the more bargains I know I have. You need to be patient when trading in a bear market. However, even in the worst bear market, the stock market is not going to be zero. That’s why you need to learn to control your fears. ”

“I withdraw money from my trading account if I withdraw too much money,” says investor Warren Kaplan.

When to sell

Kaplan has an important selling rule: “I withdraw money from my trading account if I withdraw too much money.” The reason, he says, is that he does not like to take big risks and maintaining a profitable position for a long time increases the risk.

“When will I sell?” he asks. “I can sell if the market tone is not right or if the dividend yield is moving too low. “My intention is to buy the same shares again at lower prices.” He admits he is a reluctant seller, but will sell if needed using the options market to complete the sale.

Cash is not rubbish

Kaplan points out that it’s not bad to keep cash. “You can only get 1% when inflation is at 7%,” he says, “but a 1% cash return is a much better deal than a stock falling 20% ​​to 50%. Some people complain about losing 7% due to inflation, while their share may lose 40%.

However, Kaplan is painfully aware of the damage being done to bear markets. “I am sometimes asked, ‘What is the worst bear market?’ I always answer: The one I am in “.

Michael Sincere (michaelsincere.com) is the author of “Understanding Options” and “Understanding Stocks”. His latest book, How to Profit in the Stock Market (McGraw Hill, 2022), presents successful investment and trading strategies in the bull and bear market.

More: Those who buy shares on the day the S&P 500 enters a bear market have made an average of 22.7% in 12 months

Read also: Dow and S&P 500 fall, but your portfolio does not have to sink with them

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