Gavin Baker has navigated through 4 bear markets. He shares exactly how to invest in today's volatile environment - and explains why he's laser-focused on 2 areas in particular.

Gavin Baker/Youtube/CNBC

• Gavin Baker, managing partner and chief investment officer at Atreides Management, leans on past experience when building a framework designed to navigate the twists and turns of today's stock market.
• With four bear markets under his belt, Baker says we're past the first stage of the sell-off where investors get paid for "doing obvious things," and are now in the "treacherous part."
• Today, Baker is laser-focused on companies that will have reduced competition in the near-future and will benefit from the US' return to more normal, post-virus way of life.
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Gavin Baker, managing partner and chief investment officer at Atreides Management, isn't disheartened by bear markets. He's seen firms capsize, stocks plunge, and investors writhe with fear on numerous occasions.

In fact, the coronavirus-induced rout marks Baker's fourth bout with an unruly bear.

"Nobody could've imagined what we're living through two months ago," he said on the "Invest Like the Best" podcast. "Nobody could've imagined that a virus could really kind of shut down the world."

He added: "But there's so many analogs about how the world has come back from worse situations - and I think it's important to have those in mind."

Baker's sanguine perspective helped him immensely in the later stages of the Global Financial Crisis. When most investors were losing their poise and throwing in the towel, he was picking up stocks that had been "absolutely destroyed" at the beginning of the unwind.

"That really saved me," he said. "Long before the market bottomed, I was beginning to generate much more positive alpha - and then your portfolio's really ready to benefit from the recovery, which will inevitably come."

In today's mercurial market environment - which he refers to "as rich as an opportunity set as we have seen in the last 100 years" for alpha-focused, long-short investors - Baker is employing the lessons he's learned in past drawdowns to navigate today's twists and turns wisely.

It's important to bear in mind (no pun intended) that Baker warns actively trading in today's market is akin to "being in a knife fight when you're blindfolded and covered in grease."

That said, here's how he's investing in today's environment.

1. Play in the present

"No forward number means anything," he said. "Every company is going to miss [earnings]; They're all going to guide-down."

He continued: "You cannot anchor. You have to play in the present. You cannot let the mistake that you just made impair your thinking.

"You're inevitably going to make mistakes in an environment like this, and they just cannot influence your thinking."

2. Use limit orders

"Volume is not liquidity," Baker said. "Although there's a lot of volume, there is minimal liquidity. It is critical in this environment to use limit orders."

3. FIFO (first in, first out)

"The beginning of a bear market is very different than the end of a bear market," he said. "Bear markets, they work on a FIFO principle, not a LIFO principle. The first companies to be sold by the market are the first ones to be bought. That's why I think how you invest in a bear market is very different."

4. Aggressive names will lead before the dust settles

"What's going to lead the market out of this recession - and what's going to lead great companies for the next 5 to 7 years - aren't actually those safe companies with great balance sheets," Baker said.

He added: "The aggressive names start to outperform the defensive names - and that happens generally before the market bottoms."

5. Calculated risks without evidence

"If you want to generate alpha in the later stages of a bear market - and particularly in a recovery - you now do need to begin taking some risks that are not obvious," he said. "We're past that first stage of the bear market where you get paid for doing obvious things."

Baker continued: "Now we're in the treacherous part of the bear market. All the obvious actions have been taken."

Under that umbrella of thought, Baker sees a slew of opportunities brewing from the unfortunate expected spike in bankruptcies.

"I think the companies that are going to benefit the most from this are the companies where their competitors go bankrupt," he said. "Where I have been focusing is actually on both physical omnichannel retailers and quick service restaurants."

He added: "Tragically, a lot of small businesses in retail and restaurants are going to go bankrupt."

Alongside decreased competition, Baker thinks that when the US slowly starts to return to a more normal pattern of daily life, these types of businesses will be some of the biggest beneficiaries.

"We are going to get through this," he said. "I think it's important to be imaginative, to be optimistic, and to recognize that this too shall pass. The market will bottom. The economy will bottom. We will find a cure for the virus. Humanity will prevail, and there will be better days."

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