By V. B. Velasco Jr., Ph.D.
We all remember September 11th. On that day, the whole world watched the news footage of hijacked airplanes hitting the World Trade Center. On September 12th, US airports were a virtual wasteland. People were scared stiff about flying, and thousand of flight tickets went unsold each day. It was a time when Americans were afraid to buy a plane ticket.
It was arguably the best possible time to buy a ticket, though. Why? Because commercial flights were probably never any safer than immediately after the 9/11 disaster. What’s more, tickets were being sold for astonishingly low prices as the demand for air travel plummeted.
That’s what it’s like with the stock market. Generally speaking, he best time to invest in the stock market is when other people are afraid to do so—during a recession, for example. That’s when you can get the best bargains. During these periods, stocks can be purchased for much, much less than what they’re actually worth. Why? Because people are temporarily afraid, not because the stocks themselves are lacking in worth.
Mind you, I’m not advocating reckless investing. When people are afraid, it would be foolish to dismiss their concerns completely. For example, during a recession, you don’t want to invest in companies that deal exclusively in luxury items—not unless you have strong reason to believe that they will continue to perform well. However, there are strategies that one can use to invest wisely while other people are afraid to buy stocks altogether.
One time-tested approach is to invest in what are known as non-cyclical or “defensive” stocks. These are stocks in companies whose business performance and sales do not correllated strongly with the overall economic cycle. Such companies typically outperform the economy during financial hard times, and so they are generally considered to be safe investments when the fear of recession rears its ugly head.
What’s the difference between defensive and non-defensive stocks? It’s the difference between necessity and luxury. Most of us can live without a brand new car during an economic slowdown; however, all of us still need certain staples, such as food, gas, and medicine. Demand for these items is not strongly affected by a sluggish economy. The same holds true for household staples such as gasoline, soap, laundry detergent, toothpaste, and shampoo. People might cut back a little bit on such items, but not by much – after all, they’re considered to be darned near essential.
Of course, it still helps to do one’s homework. For example, I poured a lot of money into ExxonMobil stock (XOM). Why? Because Americans still consume large amounts of oil and gasoline, even when the economy takes a downturn. YEs, a lot of us will be cutting back on our gasoline expenditures; however, it’s safe to say that gas 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 other companies that provide household staples, have strong reputations, and are likely to perform well—for example, Proctor & Gamble (PG).
Playing safe is not the only reasonable strategy. For example, I also invested in Ebay stock (EBAY). I figured that during a recession, people are likely to purchase a lot of second-hand items via online auctions, and that’s one thing which Ebay does well. Besides, Ebay has no debts, which places it in a strong financial position. What’s more, because Ebay also owns the tremendously popular PayPal system, they have a huge source of revenue over and above their more familiar auctioning site.
So remember… When everyone else is running scared, that’s the time to sieze one’s opportunities. You can not completely avoid the hazards of the stock market, but you can minimize these risks by investing in defensive stocks – or by investing in stocks that are undervalued, but that are likely to perform well in the long run. These are golden opportunities, and you’d be wise to take advantage of them.
About the Author:
V. B. Velasco Jr., Ph.D. works for a small bioscience firm that provides serum-free culture media, ELISPOT readers, and CEF peptide pools/a>, among other products.
