On that fateful September
11th 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 also the best possible time to buy a ticket. 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 -- even though it was extremely unlikely that any
terrorists would choose the same tactic so soon.
That's what it's like with the stock market. Generally, the 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 asking people to invest recklessly. 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 correlated 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.
By V. B. Velasco Jr., Ph.D. works for a small bioscience firm that provides
