Opinion: ‘The stock market isn’t going to zero’: How this individual investor with 70 years of experience trades the bear market

Few investors can lay claim to a life of stock market success. Warren Buffett of Berkshire Hathaway BRK.A,
+0.10%

BRK.B,
-0.25%
comes to mind, of course, but what about Warren Kaplan?

Who? Kaplan is an 85-year-old individual investor with 70 years of stock market experience. Kaplan grew up in a poor family in the Bronx, NY, but by sticking to four simple stock market strategies through bull and bear markets, he built a comfortable life for himself and his family.

With so much confusion and volatility in the financial markets right now, the time seemed right to catch up with Kaplan, who lives in Altamonte Springs, Fla., and still manages his family’s investments. Here are four strategies Kaplan has used for success that any investor can copy:

1: Buy “Dividend Aristocrats”: There’s nothing Kaplan loves more than buying dividend-paying stocks, especially “dividend aristocrats.” These are companies that have increased their dividends for at least 25 consecutive years. “By paying a meaningful dividend of at least 3% or 4%,” Kaplan says, “it shows the board understands its responsibility to shareholders versus companies that don’t pay dividends and instead pay huge executive salaries.”

Before buying a single stock, Kaplan first looks at the stock’s P/E ratio, dividend, and dividend history. “I want a company that is really committed to increasing its dividends,” he says. “I don’t care about the last three years, but if the company increases its dividend for several years, that means something to me. This is a title that I will put on my watch list. You have to be patient and wait to buy at a price that represents good value.

Stocks Kaplan has appreciated for their dividend include Walgreens Boots Alliance WBA,
+0.92%
and AT&T T,
-0.54%.
However, he says, “getting the right price is more important than anything else.” He admits it’s often hard to know when to buy.

Kaplan suggests that investors start by buying a small number of shares of Aristocrat stocks. “Instead of buying 100 shares of a stock at $40, buy 10 shares for $400. That’s what I still do now.

2: Buy ETFs that pay dividends: Kaplan buys dividend-paying ETFs (exchange-traded funds) that investment researcher Morningstar classifies as three, four, or five stars. ETFs Kaplan likes include ProShares S&P 500 Dividend Aristocrats ETF NOBL,
+0.30%,
SPDR S&P Dividend ETF SDY,
+0.46%,
ProShares S&P Technology Dividend Aristocrats ETF TDV,
+1.15%
and ProShares Russell US Dividend Growers ETF TMDV,
+0.38%.
He also favors technology companies that have increased their dividend for at least seven years. Stocks like IBM IBM,
+1.14%
Cisco Systems CSCO,
+1.72%,
AppleAAPL,
+1.05%
and MicrosoftMSFT,
+2.23%
now meet his criteria.

3: Buy and keep (but not forever): Unlike many investors who buy and hold indefinitely, Kaplan holds stocks until the market environment changes. This catalyst could be a change in direction, a cut in dividends, technical weakness, low earnings or overvaluation. If one of these scenarios occurs, Kaplan may reduce its stake or sell all of its shares. .

4: Sell covered call options: Kaplan regularly writes covered call options on its dividend-paying stocks. Writing covered call options generates a premium and allows him to sell stock at a price he specifies. Once the stock is automatically sold (according to options rules, it is “called back”), Kaplan waits for a lower price and buys the stock back. Then he sells another covered call.

“I never mind that a stock I sell goes up and gets redeemed. I can always buy it back if I want.

Kaplan explains why he likes this strategy: “Selling covered calls is one of the most effective ways for me to continue to receive income while making money as the stock goes up. It never bothers me when a stock I sell goes up and has been called. I can always buy it back if I want.

Kaplan summarizes: “I can start by buying six shares of an Aristocrat stock, and if it goes down, I can buy eight or nine more shares. Once I have accumulated 100 shares, I sell covered calls. I use the options market to sell. This eliminates sales anxiety.

He gives a more specific example: “If a stock I own is at $38, I could sell call options at $45 with an expiration date of one to two months. I don’t care how big the bounty is. Sometimes I get a few cents, sometimes more. He occasionally sells covered calls with an expiration date of one to two weeks, but he usually chooses a month.

Kaplan’s philosophy is that he’d rather make a penny bounty than earn nothing (or perhaps lose money to more speculative strategies). Those pennies add up over time.

“When you sell a covered call,” Kaplan explains, “you get paid immediately. I like this. I’m also happy to hold the stock, and if called, I’m happy to sell it and try to buy it back at a lower price. Anyway, it works for me. »

How to handle bear markets

Kaplan likes falling markets, including bear markets. This gives him the opportunity to buy his favorite stocks at bargain prices. “I look forward to a bear market,” he says. “I will enter a Good Until Canceled (GTC) order on the stocks I want to buy at lower prices. For example, I can buy 10, 15 or 20 stocks, depending on the stock price.

Typically, these orders are part of Kaplan’s “black swan” portfolio. This is where he tries to buy shares at extremely low prices in the event of a worst-case scenario (i.e. a crash). For example, he recently entered a small GTC order to buy Hormel Foods HRL,
-0.82%
at $39.99 per share (it closed June 14 at around $45 per share).

Kaplan has other suggestions on what to do in bear markets. “I have a higher than normal cash position during a bear market,” he says. “The lower the stock price, the more I know I am getting a good deal. You have to be patient when trading in a bear market. However, even during the worst bear market, the stock market does not go to zero. This is why you must learn to control your fears.

“I withdraw money from my trading account if I make too much money,” says investor Warren Kaplan.

When to sell

Kaplan has an important selling rule: “I withdraw money from my trading account if I make too much money.” The reason, he says, is that he doesn’t like to take big risks, and holding a profitable position for too long increases the risk.

“When do I sell?” he asks. “I can sell if the tone of the market is not good or the dividend yield is too low. My intention is to buy back those same shares at lower prices. He admits to being a reluctant seller, but he will sell if necessary in using the options market to close the sale.

Money is not trash

Kaplan emphasizes that money is not bad to hold. “You might only get 1% when inflation is at 7%,” he says, “but my 1% cash yield is a much better deal than a stock that’s down 20% to 50 Some people complain about losing 7% because of inflation when their stock could lose 40%.

Nonetheless, Kaplan is painfully aware of the damage caused by bear markets. “I’m sometimes asked, ‘What’s the worst bear market?’ I always answer: The one in which I am.

Michael Sincere (michaelsincere.com) is the author of “Understanding Options” and “Understanding Stocks”. His latest book, “How to Profit in the Stock Market” (McGraw Hill, 2022), presents successful investment and trading strategies in bull and bear markets.

After: Those who buy stocks on the day the S&P 500 enters a bear market have gained an average of 22.7% in 12 months

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