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Trading stocks for over 25 years, I’ve lived through several bear markets. Though painful, they have tended to be huge learning experiences for me. I remember my first bear in the summer of 1998. I had been trading my own personal account for just six years, so I didn’t know what I didn’t know. But I soon found out what little I knew about the cruel world of Wall Street. While the stock market crashed almost 20% in just two dreadful months of July and August, my personal account doubled that loss. I was devastated and perplexed to say the least, but more importantly was humbled and curious about how I could lose so much money in so short a period of time. I determined then and there that I would devote myself to learning how to never drop that kind of cash again, or quit trading altogether.

Four years later in 2002 the stock market got cut almost in half, going down 49% in just a few short months. I had learned a lot by this time, and my portfolio only went down 13%. Still painful, but manageable, as I was able to get back to square within a year.

The big bear, and the one you probably remember most vividly, came in the fall of 2007. Over a seemingly never ending five-month period the stock market retreated almost 60%. Though I took my lumps in September and October of ‘07, experiencing a two month drawdown of just over 12%, I ended the year down only 1%, and was safely in cash as Wall Street continued to take everyone’s retirement accounts out to the wood shed until March of the following year.

It’s been eleven years since the 2007 meltdown, and I think we kind of forgot what a bear market looks and feels like. So far this pullback, or correction, or whatever you want to call it, has been nothing out of the ordinary. Just your everyday, run-of-the-mill reset so far, but because of the three year calm that’s hovered over the market it’s one that’s giving folks the jitters nonetheless.

I’ve been writing Trick of the Trade for over five years now. I’ve said it several times, and I’ll say it again, the biggest trick of the trade to becoming and remaining a successful trader is to learn how to keep from losing a bunch of your money during bear markets. If you can learn how to preserve as much of your cash as possible during the down times, you’ll be well on your way to long-term success in this business. As Warren Buffett says:

Rule #1 in the stock market: Don’t lose money. Rule #2, see Rule #1.

Just like most everyone, I’ve taken some lumps the past couple of months, not unlike the other times the market has hit the skids. But the losses are finite and small in the long-term picture of investing and trading, and I have risk management measures in place to make sure it stays that way.

But here’s the interesting part. I’ve found that it’s the bear markets that set the table for some of the best money-making feasts. “It’s darkest just before the dawn” can apply to the stock market. My four best years for returns have been 2002, 2003, 2009, and 2010, all straight out of bear markets. While most investors were still licking their wounds from the previous year, while all the news was bad and owning stocks was the dumbest idea in the world, I made money.

Think about it. When do you want to buy your dream home? When the real estate market is flying high, sellers are getting their full asking prices with no contingencies, and home prices are appreciating at break neck speed? Or do you want to purchase when housing is in the tank, there are few buyers, and prices are plummeting? I want to buy my house when the seller is practically giving it away and I’m the only buyer for miles. I want to buy stocks the same way, when everyone hates them.

So right now I’m not only spending my days controlling the downside as we work our way through this mini-bear, I’m also looking for the stocks to own when we finally come out of the darkness and into the dawn. You see gang, even during the downturns the market provides clues to which horses will be first out of the gate and into the winners circle during the next bull leg. The trick of the trade is knowing where to look.

Let’s go back to real estate for a minute. In a housing bust when home prices crater, some neighborhoods and certain homes tend to hold up better than others. It’s typically those same neighborhoods and houses that will appreciate the quickest and strongest once the market turns higher. It’s the same thing in the stock market. If you want to locate the areas and stocks that will most likely emerge fast and furious when this stock market drought ends, simply look for the sectors and stocks that have been holding up the best the past couple of months.

So what’s held up the best? The defense sector for one. Some of the technology names have hung in, but you have to sift through to find them. Even a couple of the FAANG stocks have refused to crash even with the daily onslaught of bad news and repeated tweets from our Commander in Chief. Oil and oil related stocks are doing fine while the stock market has retreated. Many of the boring consumer discretionary stocks have been looking fine. Yes, they are boring stocks, but you can get over it if they can show you the money. Real estate and utilities are performing well, but remember they can oftentimes run counter-clockwise to the main stream market, so take their performance with a grain of salt when counting on them to lead out of this downturn.

The areas that have performed the worst in the past two months? Financials, biotech, energy infrastructure (MLP’s) and telecom just to name a few. I wouldn’t trust them to be first out of the blocks.

We’re in our third longest streak without a new high since 2013, so just like you, I’m looking forward to this market pause coming to an end soon. Going from extreme calm to hair on fire volatility in just a few short weeks is not how any of us would have scripted it, but it is what it is, and it may not be over any time soon, so patience is our word of the day. Downtrends can last longer than your money can, so be careful. All we can do is limit our risk until the all-clear signal is given, and then be ready for what should be some excellent money-making opportunities. I’m making my list and checking it twice of what stocks have been naughty and nice in February and March. It’s the nice ones that I’ll hope to ride to gains before 2018 comes to a close.

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