How to Profit From the Next Bear Market

See how stalwart companies like Procter & Gamble and ExxonMobil make great portfolio ballasts when the market sinks.

Grant Perry
Grant Perry
Apr 14, 2014 at 7:04PM

Bull Markets don't last forever. Statistically speaking, they average about 30 months in length. We know the market will enter a downturn at some point, so don't fear the bear market -- be prepared!

Bear markets
A bear market is regularly defined as a drop in index averages 20% or more. There have been 25 bear markets since 1929. Their average length is 10 months, their average decline is 35%, and they occur on average every 3.4 years.

It has now been more than five years since the last bear market, which is well over the average. The next is knocking at our doorstep.

Timing the next bear market is next to impossible. But what you can do is prepare for your future by making sound investments that can survive or thrive in any market. What do these sound investments look like?

Preparing for the bear market
When bear markets come, you want to be invested in companies that will always do business, barring nuclear fallout. These companies typically make nondurable goods or consumables -- things that are used on a consistent basis like cleaning products, toiletries, food, fuel, paper products, and medication. But just because the company does business in the nondurable sector doesn't mean it's a great investment. All types of companies can be mismanaged, so research prospective investments thoroughly. You want to find companies that have not only great products, but also effective management teams that care about their consumers and shareholders. This type of preparation will set you up for success through the good times and the bad. Investing knowledge is the basis for making a good decision.

Two great examples of quality companies in the nondurable goods business are Procter & Gamble (NYSE:PG) and ExxonMobil (NYSE:XOM).

Procter & Gamble is one of the leading companies in the nondurable goods market. Why Procter & Gamble? Simply put, it makes many of the major name brands in the center aisles of the grocery store. They include, to name a few, Old Spice, Cover Girl, Pampers, Charmin, Tampax, Tide, Swiffer, Febreeze, Duracell, Nyquil, Gillete, Crest, and Prilosec (it would take too long to name the company's 50-plus leading brands).

Yes, P&G has great products, but what about its management? For starters, the company has grown sales for the past four years and most recently made a profit margin of 13.4% on $84.1 billion in sales. Management also treats shareholders well. Procter & Gamble has 58 years of dividend growth behind it, currently yielding 3.2%. Great products, solid management, and a great dividend yield will treat you right in any market.

Similarly, fossil fuels and their byproducts are not going out of style anytime soon, and neither is ExxonMobil. The U.S. Energy Information Administration has estimated that at current production and supply, there are at least 25 years' worth of liquid fuels remaining, not accounting for newly found or developing resources, or technological advances that will increase supply longevity. ExxonMobil is involved in almost every aspect of the fossil fuel industry from exploration to the gas pump. Last year its diversified operations brought in a massive $424.3 billion in sales at a profit margin of 7.6%. Although revenue has slipped by 9.9% over the past few years, Warren Buffett wasn't discouraged: His conglomerate Berkshire Hathaway revealed a new ExxonMobil stake of more than $3.4 billion in late 2013. (Buffett also has a large stake in Procter and Gamble). If anyone is a Foolish investor, it's definitely Mr. Buffet.

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When these types of companies lose value because of the bear market, it's generally not because they're performing poorly; they're primarily feeling the marketwide selling pressure. We've all said "If it were just a little bit cheaper, I'd buy it." If a bear market really does show up and maul our portfolios, then you might have a perfect opportunity to invest in these great companies.

Be faithfully Foolish
The bottom line is that you should continue to invest in solid companies with good products and great management that will survive a poor economy and flourish when things are going well. When you make sound investments, a bear market is much less frightening and may even present the chance to find the deal of a lifetime.