Stock Strategies for an Uncertain Market

April 2025 Newsletter

In this Newsletter, I will talk about taking advantage of a big market drawdown, as well as the risks and potential rewards of doing so.  In my last newsletter, I discussed the tariff madness in the market, and the fact that up until that point things were not so bad.  Less than a month later, we have seen some incredible moves down as well as some big moves up.  The S&P500 fell into correction territory at one point, mostly as a result of inconsistent and antiquated US Economic Policy.  

The market is not happy at this moment. It does not believe what it’s being told by policy makers.  The market is forward looking, always trying to price in all available information.  Right now, it’s attempting to price an uncertain future where corporate earnings are likely to fall, which will inevitably affect stock prices.  It’s so unhappy that in addition to falling stock values, it’s showing other signs of stress such as money flowing out of both US stocks and treasuries.  This does not happen often and some experts are reported saying that policy makers almost broke the world credit system, and that’s why the proposed tariffs were placed on a 90-day pause.

What will US economic policies look like going forwards? If only I could know the answer to that question! I could surmise that US policy makers tested the upper limits of their tariff strategy and therefore will not go any further. But there is no way to know if that’s true as decisions are not being made based on sound economic approaches.  I can only assume that at the very least, the chaos is likely to continue.

Time to Set Up the Big Bear Strategy… Just in Case

Although the market is only down 6%, there are enough uncertainties to warrant this anticipatory approach.

I don’t get too excited when the market corrects in the 10% area.  Would I rush and buy that Lexus I was eyeing at the dealer on a 10% sale? Probably not. That type of discount is pretty standard. But things become much more interesting if that Lexus sale approaches 20% or more.  This is what my bear strategy is aiming for. I’m looking for market panic… people dumping everything, regardless of the fundamentals.  We clever small investors will seek to sort through and nab the best companies at all time lows. The strategy is a bit scary, but this is where the big money can be made. It’s like a car dealer selling brand new Lexuses at 50% off. 

What If the Market Does Not Crash?

There are no certainties; even though things look bad, the market may not crash. Instead, we could see continuous volatility, where the market trades up and down with no clear direction. The resulting malaise could go on for years.  In this case, we will have to pick and choose opportunities as they arise.  This situation is not as easy or as obvious as the big draw down scenario.

My bear strategy has 3 basic components: a threshold strategy (1- when to buy), which works in tandem with a purchase strategy (2- what to buy), and is then followed up with a funding strategy (3- how to pay).

The Threshold Strategy 

Since no one knows how far the market will go down or rebound, the best we can do is to start buying at certain thresholds.  Although arbitrary, these could be -20%, -30% and -40%.  This way you can average into the drawdown no matter when it reverses.  It means you will not make the biggest return, but you will not entirely miss the wave either. If you were to invest 30k during the drawdown, you could buy 10k at the 20% threshold, 10k at the 30%, and so on.  

The Purchase Strategy 

There are so many ways to buy down-and-out positions for this strategy. Here are a few approaches, including doing nothing at all (which is also valid).

1- Buy Oversold Companies

It’s a pretty simple, approach, but which ones should you buy? The ones that got hit the hardest! Panic selling always goes too far in a particular sector.  If it’s technology for instance, buy technology.  If its communications, mag 7, or energy, that’s what we buy! The caveat here is that companies have to remain viable and unnecessarily cheap.  We are not looking for positions that are distressed in any way other than in price.  These companies have to have a high probability of surviving, and doing well in the future.

2- Buy Sector ETFs

Alternatively, we can use the same approach as above except to buy market or sector ETFs.  So if Technology got hammered into oblivion, we can buy a Technology Sector ETF, or even a Nasdaq index ETF.  The advantage here is that it’s easy, safer, and not subject to individual company results.  The downside is that returns may not be as good.

3 – Buy Options

I’ve used options in the past with great success.  This is a more advanced approach and not for the faint of heart.  I would buy a deep in the money call option on the market index, which provided me at least double leverage for every move of the index.  This can be done with the S&P500, the Nasdaq, or individual companies.  So if the market bounces back up 25%, our deep in the money call option will bounce 50%.  The risk is that it also works the other way.  If the market loses an additional 10%, then we lose 20%.  There is also a time duration aspect that has to be considered.  

4 – Do Nothing

I often promote doing nothing as it’s statistically better when it comes to investing.  There’s nothing wrong with doing nothing, even in a big drawdown.  What would likely happen in my case is that my portfolio would enjoy a much less severe drawdown due to the nature of my defensive positions.  When the market rebounds, my portfolio will rise, but not as much as the index because the market will be led by areas most affected by the drawdown… the same ones I do not own.  My huge lead over the market would narrow quite a bit.  So there is an incentive to become less defensive in order to better ride the market back up. 

5 – Do Almost Nothing

A slight variation on doing nothing, is to buy what you already have.  Why not if you thought they were good enough to hold? If any part of your portfolio gets drawn down more than the rest, then it can be rebalanced by selling areas that did well and buying the distressed positions.  They will inevitably go up more when the market rebounds.

6 – Graze Like a Farm Animal

Ok, that is an odd title.  The approach here is to be less tied to the overall market.  Like a goat, we can graze our way into new positions as they occur.  The reality is that the market is an average so some stocks will experience huge drawdowns before the main market does.  Thresholds for buying are stock-specific in this case.  This is a more unstructured case-by-case approach, but still very valid.

The Funding Strategy

As if buying shares in a massive drawdown isn’t already scary enough, there is another problem: how do you fund them? It’s always better for returns to be fully invested.  So how do you buy new shares of heavily discounted panic sold positions if you have no cash?  

There are many ways to find new money, like defrauding seniors, which seems to be in right now.  Seriously though, you need to borrow new money (leverage), or rearrange the portfolio by selling positions that did well in order to buy positions that did not.  For example, selling grocery companies to buy beat-up riskier companies.

Borrowing is easy; most trading accounts allow quite a bit of margin (loan against your portfolio).  This is quite dangerous though, so I usually allow only a 10% margin (i.e. borrow $10k on a $100k portfolio).  This self-imposed limit protects me against “what if I am wrong scenario”.

I could also take out a mortgage on the house. It’s a viable approach, but also really aggressive.  The “what if I am wrong” scenario tells me not to bet the farm (or house).  That said I am sure this can be done successfully under strict parameters. For example, by investing in really solid positions like Costco, Berkshire, certain banks, etc. In other words, transferring one form of equity to another.  Still not my favourite choice.

Conclusion

I’m not saying that there will be a market crash, as these are hard to predict with any accuracy. What I am saying is that the probability of such an event is currently much higher than normal (in my opinion) and as such, it is prudent to think about how we could benefit from such an event. Surprisingly, I have performed much better in these situations than in a normally priced rising market. Given enough time, a big drawdown will certainly occur, but will it be this year or in 5 years? No one knows. But it’s good to be ready either way.

Marc’s Monthly Moves

Note: that this month’s buys and sells reflect my continued move away from US positions in favour of international and Canadian stocks.

Sell

• Quest Diagnostics Inc. (DGX)
• Tractor Supply Company (TSCO)

Buy

• Franklin FTSE United Kingdom (FLGB – a UK market index ETF)
• More Telus (T.TO)

Marc’s Portfolio YTD Performance

• Portfolio return: 0% (including currency loss)
• Portfolio return: +3% (without currency loss)
• S&P 500 return: -6.06 %
• RSP ETF S&P equal weight -4.44% 
• TSX: -.07%

The portfolio is over performing the S&P500 by 9.06% points.