By V. B. Velasco Jr., Ph.D.
Over the past few months, I’ve seen the selling price for my precious stock
holdings go down—sometimes, alarmingly so.
Does this worry me? Not so much. That’s because I realize that these drops in
the stock market have been precipitated by consumer fears over an economic
slowdown. (We could argue all day long about whether the USA is technically in
a recession or not, but few of us would dispute that the economy has been
lagging.)
In fact, savvy investors would view the current economic situation as a great
opportunity. Quality stocks are being unfairly devalued, which makes them
available at a real bargain. That is, stocks are being sold for less than
they’re actually worth, simply because consumers are afraid. This fear can
create golden opportunities for investors who are willing to plan cautiously
and do a little research. Remember that one investor’s panic can be another
investors’ profit.
So how does one invest wisely during a national economic slowdown? Most of us
aren’t inclined to perform voluminous amounts of research in our spare time.
One way to minimize the amount of risk involved is to invest in non-cyclical or
so-called “defensive” stocks. These are stocks in companies whose business
performance and sales are not strongly correlated with the overall economic
cycle. These companies typically outperform the economy during financial hard
times, and so they considered to be generally safe investments when the fear of
recession rears its ugly head.
Quite simply, the difference between defensive and non-defensive industries is
that between necessity and luxury. Most of us can live without a new car during
an economic slowdown; however, we still need certain staples, such as food,
gas, and medicine. Demand for these items is not strongly affected during a
sluggish economy. The same holds true for household staples such as soap,
shampoo, and toothpaste. People might cut back a little bit on such items, but
not by much – after all, they’re considered to be darned near essential.
For example, I purchased a large amount of stock in ExxonMobil (XOM). Why?
Because Americans still consume large amounts of oil and gas, even when the
economy takes a downturn. Sure, a lot of us will be watching our gas
expenditures more, but it’s safe to say that gasoline consumption will continue
to be strong. I picked Exxon/Mobile because it’s a large, stable company—the
most profitable and financially healthy of the major oil firms. It has a long
history of strong performance, and because industry analysts give it very
positive ratings.
I also invested in that great old standby, Proctor & Gamble (PG). Why?
Because everybody knows them and uses their products—coffee, razors, medicines,
batteries, detergent, bathroom tissue, personal hygiene products, and so much
more. They have outstanding financial ratings, and it is one of the largest and
best-known companies in its field. It is likely to provide a safe, stable
source of investment in the year to come.
So remember… When everybody else is scared, that’s the time to be bold. You can
not completely avoid the hazards of the stock market, but you can still play
wisely and with relatively little risks. By picking safe, stable defensive
stocks, you can take advantage of everyone’s fear and expect a potentially high
payoff.
About the Author:
V. B. Velasco Jr., Ph.D. works for a biotech firm that provides
ELISPOT research services, ELISPOT plate
readers and other immunology
research products and services.
