| On September 11th, 2001, the whole world watched the news
footage of hijacked airplanes hitting the World Trade
Center.
On the very next day, 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 also the best possible time to buy a plane ticket.
Why? Because commercial flights were probably never
any safer than immediately after the 9/11 disaster. Terrorists were,
after all, extremely unlikely to use the same gambit so soon.
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 foolhardy 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 classic, 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 is 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).
Investing defensively is not the only reasonable strategy,
though. 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.
V. B. Velasco Jr., Ph.D. works for a small bioscience firm that provides serum-free culture media, ELISPOT readers, and cryopreserved PBMC
samples, among other products and services. |
