Survive the Market Drought

Gas prices are high. The consumer could be tapped out. Adjustable-rate mortgages are ready to index higher as the Fed continues to raise interest rates to stave off inflation. This doesn't look good.

With all of these uncertainties, are you worried about a stock market drought, where returns will be flat or even negative? I am. But we can survive this market drought by taking a few tips from the sand gazelle. That's right, the sand gazelle.

Amazing adaptability
The sand gazelle does two amazing things to survive in the Arabian desert for long periods without water. First, it shrinks the size of its heart and liver, so that it can slow its breathing and exhale less water vapor.

Second, it maintains a high concentration of fat in its brain. The extra fat ensures that its brain works correctly, even during prolonged extreme environmental conditions.

In other words, to survive a drought, the sand gazelle preserves the precious resources it has, yet keeps its mind in peak condition. But what does this have to do with investing? Bear with me.

Be a drought beater
While water is critical for life, capital is critical for wealth. So to survive a market drought, we must work to preserve our capital. Remember Warren Buffett's two rules of investing:

1. Don't lose money.
2. Don't forget rule No. 1.

How can we preserve our capital? By shrinking our exposure to companies that are expensive relative to their value. Because when the market falls, the most expensive stocks with the highest expectations will fall furthest.

Yet even during the worst market drought, we must make sure our brains are prepared for opportunity. That's why we need to think clearly about what's going on in the market, working to stay out of its traps and exploit its opportunities. And we fill our brains with knowledge while we wait for the market to offer up the next big bargain.

To the survivors go the spoils
The last big market drought ended in October 2002, when the S&P 500 hit its lows following the collapse of the tech boom, the events of Sept. 11, and the revelation of massive corporate fraud. Yet investors who were able to survive and keep their wits about them amid this calamity found themselves with a number of incredible buying opportunities:

But in order to take advantage of these opportunities, you needed to have the cash, and you needed to be ready.

The Foolish bottom line
The sand gazelle is able to survive in some of the harshest conditions on the planet, and it teaches us valuable lessons about surviving (and eventually profiting from) a prolonged market downturn:

1. Shrink the amount of speculation in our portfolios.
2. Stay on the lookout for new ideas.

And if tomorrow's winners are going to be anything like the companies mentioned above, then they will have the cash to help them through any operational difficulties, they will operate in germane industries that can withstand even tough market conditions, and they will be trading for less than their intrinsic value.

If you'd like a hand finding bargains that should survive the low-return drought and flourish when the market environment picks up again, consider joining us at Motley Fool Inside Value. Those are exactly the companies advisor Philip Durell looks for, and his picks are beating the market by two percentage points. Click here to learn more.

Fool David Meier is a member of the Inside Value team and does not own shares in any of the companies mentioned. NVIDIA is a Motley Fool Stock Advisor pick. The Motley Fool has adisclosure policy.