Value Investing in Bear Market
With so many companies trading at a discounted price, how do we derive which companies to start zooming into?
Today I will be sharing with you something that my coach Manoj, taught me. It will serve as a quick guideline to determine the companies that we should dive into.
SPY, SPX and /ES mimics the movement of S&P 500 which consist of the biggest 500 companies listed in US market. It is an indicator that people normally use to gauge the movement of the overall US market. SPY is an ETF, SPX is an index and /ES is a future but essentially, they are similar in terms of their movement.
As you can tell from the chart above, SPY has dropped to a current price of 222.95 vs a high of 339.08. That equates to a drop of about 34%.
What do we do now? Firstly, you draw a chart with a line of -34% to demarcate the dropped in SPY. As you can see from the chart above, -34% lines separate those sectors that dropped more and those sectors that dropped less as compared to 52 weeks high.
With this information, you can decide on the sector that you want to dive into. You will then do the same for individual companies that you are interested in.
For example, lets look at some of the companies that I randomly picked from S&P 500, they might not necessary be from the same sector.
From the picture above, if you are looking to accumulate companies. You should only look at those companies that are trading at least 34% below their 54 weeks high. There is more value locked in these companies as they are hit more than S&P 500. If you are looking to accumulate companies above the 34% line, you might be better off buying SPY instead as the risk reward ratio is better. SPY as an ETF tracking S&P 500 will not go to 0 but individual companies have the risk of their share price going to 0. This is especially important in times like this where new situations are unfolding every day. With the help of globalisation and technology, things are changing and moving at a much faster pace than ever before.
During high implied volatility market, the market deemed that there are many uncertainties and they are priced into the option premiums hence options will cost more during times like this. If you have a few companies that you are interested in buying, you can take advantage of the high implied volatility in the current market and sell some options.
For example, lets look at a real trade that I did a few days ago. On 20th March, I sold a PUT option on RCL at a strike price of $14. RCL is the ticker symbol for Royal Caribbean Cruises. RCL was trading at $22 then. I collected a premium of $76 with a total risk of $1400. That is a whopping 5% plus in 7 days.
What will happen for this trade? There are 2 scenarios.
Scenarios 1 - RCL dropped to $14 and I get to purchase it at $14 which is a price that I am comfortable in buying. With the premiums that I collected; my entry price is now $13.24. I will proceed to sell a Call Option.
Scenarios 2 - RCL continues to trade above $14 and I get to keep my premium of $76. Rinse and repeat, continue to sell another Put Option to collect more premiums.
Currently, RCL is trading at $28.19 as the time this article is written. Let’s see how it will turn out.
Alternatively, if you are not comfortable in holding individual companies at this point of time. You can purchase the following SPY, QQQ, IWM ETFs as well. Add them into your portfolio, and you should be able to achieve 10 – 15% Return of Investment P.A.
