Published on 27, Jan 2023

Shaunak Misra of Dumont Global: Tips on Navigating a Bear Market

Shaunak Misra is the new partner and senior analyst at Dumont Global, a New York based investment fund that focuses on orphaned assets, such as niche industries, esoteric geographies, and unclassifiable securities, which are often small, mid, micro cap companies.

Misra shares that 2022 has been a year like no other, with record highs in inflation which have prompted interest rate hikes exceeding any level that most market participants have ever seen. Consequently, risk-assets have seen a sharp contraction in price. Misra teamed up with his Portfolio Manager to analyze some lessons from great investors that Dumont Global is using as a guide in today’s markets.

The great news is that any investor can benefit from these lessons. For those new to the investment milieu, a bear market refers to “a decline of 20% or more of a major stock market index, such as the DJIA or S&P 500, for a sustained period. A bear market is the opposite of a bull market, a period marked by market gains of 20% or more” (Forbes).

Essentially, bear markets can be characterized by pessimism and low confidence among investors, when they seem to ignore good news and consistently sell as quickly as they can, which causes prices to drop even more.

Misra and his team have the following tips for navigating a bear market:

1. Focus on cash flow. Companies with positive free cash flow (FCF) can de-lever (reduce leverage and pay back debt) and buyback their stock. Stocks reliant on EV/TAM or EV/sales valuation require multiple-rerating, a ponzi-esque dynamic.
    
2. Focus on low leverage. Companies with appropriate leverage can play offense in the downturn. Appropriate leverage is very sector-dependent. Also, leverage should be lower at the portfolio level – bear markets give you better forward-looking returns, so you don’t need the leverage.
    
3. Simplify: sell marginal positions so attention can focus on finding the next big winner. Over-diversification is acceptable and sometimes even needed in a bull market. You should concentrate in a bear market: finding the companies that will exponential returns and avoiding (or shorting) those that will bankrupt.
    
4. Extend time horizon: This one is counter intuitive. In bear markets, everybody faces redemptions and managers become short-termist, trying to avoid negative months. You will see a lot of situations that are “a clear double on two years, but dead money for six months” that nobody wants to own. Conversely, in roaring bull-markets you should be more short-term, doing more merger arbitrage and hedged trades (hedging your trades to protect against potential losses).
    
5. Don’t become a macro trader: Bear markets are caused by macro factors: a recession, rise in interest rates, spike in oil prices, etc. It’s tempting to focus your attention on those factors to predict when the market will turn but this is impossible. Instead, remain focused on picking single-name securities that are priced for an asymmetric risk/reward, under a variety of macro-outcomes.

Misra adds that it’s important to keep in mind that the “pendulum swings both ways” – markets can become overly exhuberant in good times and overly pessimistic in bad times, following some of these lessons can help be more balanced and grounds-up in their assessment of the merits of an investment.

Website: https://dumontglobal.com/

Contact: sm@dumontglobal.com