At first, I thought they had fallen asleep.

Each kid had their face buried in a pillow. Then came the sobs and crying.

And that’s how we wrapped up our Sunday night … right after our Cincinnati Bengals came oh so close to winning their first Super Bowl.

We were all devastated by the loss, but I certainly didn’t expect my children to be brought to tears.

I tried to calm them down by explaining how things went wrong on that last drive … the dynamics at play on each side of the football.

And the more I broke the loss down, the more I realized that this lesson wasn’t just about football.

The Most Important Thing

In most sports, the offense gets all the attention.

That’s because offense is fun and flashy. Quarterbacks in football, strikers in soccer … they occupy all the poster real estate in my son’s bedroom!

And just like in sports, playing offense in the stock market is fun.

Pushing new positions and watching your wealth grow as stocks rally … it gives me a feeling similar to watching my favorite team score the ball.

It’s exciting and inspirational.

But here’s the thing: Defense is what keeps you in the game. Defense can even win championships.

That’s what sealed the win for the Rams in the final seconds of the Super Bowl. They arguably have the best defensive line in the entire NFL.

In the stock market, playing good defense comes down to protecting your lead as well.

Here’s how to build the right habits in tough stock market environments.

Play Good Defense in Your Portfolio

Just like a good defensive linebacker, you need to be able to read and react to market conditions.

And in the last four months, conditions have changed quicker than any time I can recall in my two decades of trading.

I talked about the most important current market dynamics here.

At the moment, it’s time to place more focus on the defensive side of the ball. Here are the keys to staying ahead right now:

  • Be Patient. Stay true to your discipline. If conditions don’t favor adding a position, then don’t force a trade. Remember that cash is a position.
  • Be Tactical. Buy-and-hold strategic investing is easy and has worked for a long time. But these conditions call for a tactical approach to trading opportunities. You need to be flexible.
  • Hedge Your Portfolio. In this case, hedging means having protection in place if stocks are falling. You could look at safe haven assets like gold as a hedge against calamity, but my preference is to use put options that you know will gain in value if the stock market drops.

These are the ways to build a solid defensive foundation in the stock market. Because right now, it’s all about protecting the tremendous gains we’ve seen following 2020’s bear market.

Best regards,

Clint Lee
Research Analyst, The Bauman Letter