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The Little Book of Bull's Eye Investing: Finding Value, Generating Absolute Returns, and Controlling Risk in Turbulent Markets by John F. Mauldin

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Chapter Six

Dancing with the Bear

Past Performance Does Not Equal Future Returns

UP TO THIS POINT, we have mostly discussed the long-term secular bear market along with the slow economic growth I expect for the rest of the decade. Now, however, I’m saying you should invest in stocks. But how can you dance with a bear without getting claw marks all over your back?

The answer is straightforward, if not exactly simple: when you dance with this bear, you need to be the one leading! You can use this bear cycle to build wealth rather than let it destroy your assets. The next few chapters won’t provide you any specific stock picks. I will, however, offer you principles for finding stocks that will increase your wealth. I’ll also explain how to evaluate when to buy them. Contrary to what your broker says, today may not always be the right time.

The Fundamental Nature of Bull’s Eye Investing

Let’s look at a few rules about how to directly invest in stocks in a secular bear market.

First, when I showed you that we are in a long-term secular bear market, I used broad market averages made up of large companies. In this cycle, we will see the price-earnings (P/E) ratios (the valuation) of those indices slowly come down.

The two key words here are valuation and average. When the average P/E is 15, there are many stocks with P/E ratios of 20 and others with P/Es of 10. As the indices averages come down, over time there are going to be stocks that begin to have distinctly low P/E ratios for one ...

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