What do you do in a recession? Some people think it’s safer to get out of the market. Meanwhile, others are looking to buy discounted stocks.
But timing isn’t as easy as it sounds. You may buy “low” and see the stock go even lower. Or you could not buy and then watch it scale to the Moon.
Whether you take the opportunity or not, it’s safe to assume nobody likes losing money. When the whole economy is at risk, you can’t do much to preserve your wealth. Rather than looking to get rich, you have to invest to at least not lose what you already have.
Large-scale changes can affect unrelated industries. But because of the product/services provided, some of them continue to thrive regardless. When everything falls, these sectors get more demand or at least conserve their valuation.
You may haven’t thought of recession-proof businesses because they aren’t as attractive as hot stocks. When it comes to consistency, which ones do you think will secure your wealth? Markets can’t always go up.
Even recession-resistant stocks can fall. But while others are risking on volatile markets, you’re on the green no matter what.
That neither means every single trader who buys from these companies will make money. After you pick your stocks, you’ll need a smart strategy to profit, which is what we’ll cover at the end.
- What Would The Ideal Stock Look Like?
- Recession-Proof Stocks
- Recession-proof Investing Strategies
What Would The Ideal Stock Look Like?
Short answer: no stock is perfect without context. Your goals may be different, just as some people prefer to stay away from the stock market.
Let’s take the approach of the average Joe who wants to use the markets to preserve wealth, preferably with low risk. What criteria do you use for the selection?
#1 Price Volatility
How do you define a good stock? If it has always gone up, is that enough to decide to invest?
Think about how unrealistic it is not to see a single red number for years. If that existed, traders would come in and deviate the price from reality.
What causes prices to change so dramatically? If supply and demand are constant, it may have something to do with innovation, the economy, or people’s interest in that stock.
Volatility can be both an opportunity and a problem, depending on how you time the market (nobody does it perfectly) and how you assess risk. But if you don’t know the long-term trend, you won’t know what the ultimate price will be.
Long-term investors stay away from volatile stocks because of how hard it is to set accurate expectations. Although you can 10X your money by showing up at the right time, the inverse can happen as well, especially if manipulated.
#2 Price history
Many feel excited to find the cheap stock that will be 10X the next month. But along with high rewards, there will be higher risks. If nobody has heard about it yet, it may mean:
- Prices are low, and you arrived early.
- There’s not enough interest in that company.
More history makes it easier to understand how the events affect the price. If the company has just started, it requires you to do far more research before making a decision. You might be bullish on that stock when not even the company knows if they’re going to make it.
Most stocks follow the same patterns in different price ranges. If the one you found has potential but doesn’t follow the trend, it may be a chance to diversify your portfolio.
#3 The industry
Although big changes affect all industries, it generally doesn’t happen to all of them at once. One indirectly affects the other, giving traders enough time to foresee these trends.
Before you buy it, look at the general performance of the sector. Why are all the other related stocks priced that way? Which ones have the smallest and largest ranges? Fast-changing stocks have more risk-reward opportunities, while “stable” companies serve to preserve your wealth.
If you can understand what causes one industry to affect another, you can anticipate after the first events. Research and read the news about those sectors that affect yours indirectly.
Instead of looking at one company, you’re learning the whole ecosystem and what motivates people to buy.
#4 P/E Ratio
Despite long-term projections, people can make a stock worth whatever they want with their perception. Depending on how confident you are on your prediction, it will affect how much you spend on that company.
How much would you pay for every $1 of company earnings? High numbers like 16 mean high expectations about the future. Low numbers show people are ready to dump it.
Tech companies will likely have higher ratios because of the exponential growth potential.
If enough people believe in the trend, it becomes a self-fulfilling prophecy, at least in the present. Years later, prices will inevitably change to match the actual value the company created.
Regardless of your style, all trading strategies recommend researching the company. The long-term investor will define his allocation and add to those positions periodically. They don’t expect to sell their stocks until years or decades later.
High-frequency traders who try to time the market will test until they find a strategy with decent win rates. Next, they watch the stocks they’ve studied and come in when the price is falling (or going up if you’re shorting).
Think of something that has intrinsic value. Staples? Public works? Healthcare? Repairs? Financial services? Entertainment? Not everything falls on a recession. You’ll find stocks that:
- Do well until a recession brings the price down.
- Do well, regardless of the economy (also known as static industries).
- Get more demand during a crisis.
Historically, the most hurt businesses include restaurants, hotels, automotive companies, oil & gas, sports, gambling platforms, and some real estate.
The best-performing ones are big retailers, grocery stores, alcohol manufacturers, consumer staples, cosmetics, and technology.
Before you think of your choices, you may want to take advantage of the hundreds of hours put by a research team. In particular, Jim Collins’ book, Good To Great, selects eleven excellent companies out of thousands from the list.
The group compares them with other companies to learn what they did differently and what makes a company truly great. They define greatness as a stock that prices consistently three times beyond the market or more for over fifteen years straight.
It’s been a while, and not all the eleven companies have gone through the modern economy (some fell on 2008’s crisis and others on the recent March 2020). After decades, a handful of them keep scoring the highest marks. We recommend you to check Abbott Laboratories (NYSE: ABT), Kimberly Clark (NYSE: KMB), Kroger (NYSE: KR), Nucor (NYSE: NUE), and Walgreens (NASDAQ: WBA).
If you’re looking for more to add to the list, watch the most consistent stocks of the suggested industries:
Clorox Co (NYSE: CLX), a large cleaning products brand, has crossed $200 starting from $160 this year ($237 all-time high). During the COVID, people value more hygiene and disease prevention. Expect the price to maintain at the very least.
Procter & Gamble Co (NYSE: PG) has been a big one for over 20 years. With over a billion dollars in revenue, they own the most well-known brands such as Gillette, Crest, Oral-B, Pantene, or Fairy.
NVIDIA Corporation (NASDAQ: NVDA) has steadily increased its valuation since 2018. Demand for high-end hardware won’t lower anytime soon. The question isn’t whether it’s valuable or not, but how much? Is it too late, or has the growth just started?
Amazon.com (NASDAQ: AMZN) must have appeared on all headlines by this time. Stocks went from 2K to over 3K in the last nine months, especially with the e-commerce boom caused by the pandemic. Anyhow, the CEO has always justified Amazon’s growth for its long-term commitment.
Salesforce.com Inc. (NYSE: CRM) helps enterprises automate marketing and increase conversions. If that’s important, it only becomes more valuable in a recession. Businesses will always want to get more customers and reduce costs.
Boston Beers (NYSE: SAM) is the best example of how beverage stocks rise in hard times. Even though people become “wiser” spending their money, the first phase of a recession always starts with confusion and frustration. People are more likely to fall into bad habits, which can be a plus if you invested in Boston Beers this March 2020.
McDonald’s (NYSE: MCD) works as a “stable” investment too. It did fall by 30% during the virus outbreak, which isn’t nearly as dramatic as 90% losses on gambling stocks. McDonald’s stock price started to recover two weeks later.
Biogen (NASDAQ: BIIB) has seen better days, but it has managed to price above $200 on average since 2013. You can take advantage of the ups (this March) and downs while investing in a “safe” company.
Bio-Rad Laboratories (NYSE: BIO) has just hit its all-time high this year. The exponential growth you see is a true testament of commitment, almost four decades in business. It may not be the most performing company, but when it comes to market resilience, you can’t ignore this stock. Bio-Rad is doing great this year, just as it did in 2001 and 2008’s downturns.
Let’s make a quick recount. Here is the P/E ratio and yearly increase for Clorox (28.54, 38.34%), Procter & Gamble (28.15, 13.70%), Nvidia (102.83, 204.26%), Amazon (121.43, 82.27%), Salesforce (99.54, 74.13%), Boston Beers (79.69, 136.55%), McDonald’s (35.98, 7.05%), Biogen (8.25, 24.13%), and Bio-Rad Labs (8.27, 57.56%) updated in October 6th of 2020.
Recession-proof Investing Strategies
You can still choose the best stock and lose money. In fact, joining a “high-performing” company doesn’t mean everyone is making money. When you’re buying the best stocks and losing, you may want to consider your strategy as the problem.
If you don’t fix these mistakes before getting into the market, no stock will make you rich.
Taking absolutes can be dangerous when making assumptions. According to the confirmation bias, you’re more likely to value the pros and ignore the cons. Being too confident in your prediction leads to confusion whenever the projection fails.
How much should you risk? If you’re buying correlated stocks, it’s almost like betting on a single company.
An all-in mentality (maximum risk and reward) means you’re always one trade away from either winning big or blowing it all. It wouldn’t matter how many times you got it right before (even a 99% win rate makes you broke eventually).
Buying based on recent performance
Whatever the market has been recently doing may have nothing to do with its years of history, let alone defining the future. Yet, the most advised rule sounds the most contradictory: if you want to buy low and sell high, you must buy when it’s going down and sell when it’s going up.
If you wanted to do the opposite, it’s because:
- You’re trying to time the market and don’t want to miss this opportunity (FOMO)
- You have an unconventional trading strategy
More often than not, it’s no.1. If a stock has started to skyrocket this week, guess what everyone wants to do: buy!
Imagine millions of investors who looked at the same graph and bought it before you. Since it’s already “high,” it’s more likely to bounce back as soon as a large order sells out.
The problem with rising stocks is that it takes twice as much to make it grow than it is to plummet. Lose 50% of $10, and you’ll need to win 200% back.
Please, don’t take it as an absolute rule. If it goes up or down, you should think of selling or buying respectively — get enough context first.
One VS Many
Here’s a classic: should you get more stocks and diversify your portfolio? If you put all your eggs in one basket, you’re certainly optimizing your rewards.
From the risk perspective, it’s never wise to put all your sources in one asset unless you control what happens to it. Meaning, you have direct control over the price: you’re either an active investor or part of the company team.
Look at the people behind those successful companies. Chances are they had other sources of income before “making it.” Since there’s no such thing as 100% risk-free investments, you need multiple streams. If the worst-case scenario happens, it will wipe out all your gains — even if it has less than 1% chance to occur.
Don’t confuse correlated stocks as if they were diversified. Find groups that behave differently from the others — three to five of them. Although correlated stocks will move on different ranges, they all share similar patterns.
If you want to trade frequently, choose the most volatile ones. Otherwise, pick the ones with smaller ranges (e.g., $200 and $205 as the market floor and ceiling).
The million-dollar question: how much to assign to each? That depends on your risk-reward preference, research, and what projects you trust the most.
Or you can distribute your funds equally until you get your first results. Over time, you allocate more to your winners.
Value VS Perception
Investors like to refer to the stock market as a voting machine in the short term (in the long-term, it works like a weighing machine). There’s an advantage in knowing what a stock is worth, even when people are willing to pay a different price.
The buyer’s emotions always oscillate between confidence and fear. Investors who trade without emotion take advantage of these perception gaps based on what a stock should be worth.
Although expert predictions aren’t infallible, it’s better to follow a researched strategy than following everyone else. Does the crowd have the gains you want? If they don’t, why is it?
When putting money into a company, you can allocate a portion for opportunistic trading and another for long-term holding.
Buy from sectors you understand
Investing without knowing is like playing the lottery. Everything is possible from the statistics perspective, but that doesn’t make winning likely.
It applies science and the world itself: you have no power over the things you don’t understand. You can’t see the inherent problems, let alone predicting value. You’re more likely to make money from simple projects than complex ones with high surge potential.
Warren Buffet and other top investors live by this rule as a risk management tactic. Otherwise, you’re focused on technical price analysis, which isn’t enough without the fundamentals.
If you don’t understand the risks or can’t see yourself losing money, think twice before buying.