Bear market investing

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16. Bear-proofing - sectors that historically do badly in bear markets

It makes sense, for the reasons outlined earlier, to avoid sectors and companies that are more highly rated in a bear market. In short be wary of:

• Stocks with high price earnings ratios and low yields
• Stocks with few or no tangible assets
• Loss-making companies and sectors
• Companies with high levels of debt
• Companies selling products whose purchase can be postponed

The stricture against avoiding companies on high price earnings ratios does not mean that it's okay to buy shares with low price-earnings ratios indiscriminately. As already noted, low price-earnings may simply reflect a widespread expectation that a company's earnings are about to drop sharply.

There are a number of sectors which historical precedent suggests you should be wary of in any sustained market downturn even if their ratings are fairly modest. These are:

• Housebuilders
• Any business related to motor vehicles
• Any business related to industrial materials or machinery
• Advertising companies
• Any businesses related to the stock market (eg fund managers)

The other point to reiterate is that smaller companies tend to do worse in a bear market than large companies, unless they are particularly cheap on fundamentals at the outset and are in areas of the market that are generally recognised to be defensive.

To sum up, staying invested in stocks and outperforming is about assessing critically and dispassionately every stock you currently own and deciding how well or otherwise it will hold up in more testing times. Don't be tempted into holding stocks that might be vulnerable simply because they have served you well in the past.

1. A word on bears 2. What is a bear market? 3. Why do bear markets happen? 4. How to spot the appearance of a bear market 5. How bear markets end 6. Bear market investment options: timing the market 7. Bear market investment options: the asset classes 8. Stocks: blue chips vs small caps 9. Bonds 10. Property and gold 11. Cash 12. Stocks: general principles 13. Bear-proofing - low 'beta' stocks 14. Bear-proofing - high yield shares 15. Bear-proofing - sectors that historically do well in bear markets 16. Bear-proofing - sectors that historically do badly in bear markets 17. Bear-proofing - key ratios for selecting stocks 18. Bear-proofing - investing in stocks you know and can support 19. Bear-proofing - pound cost averaging 20. Recognising the revival - a check list 21. Conclusion

• The Bear Book
• Stan Weinstein's Secrets for Profiting in Bull and Bear Markets
• The Great Crash, 1929