Defensive Investment Strategy

Pretty much everyone looks like a genius in a big bull market, right? At least everyone who is invested in the market and not holding cash.

In a big bull market, every stock is going up. Everyone is making money. The invested are getting richer. The best investment results of that bunch are the aggressive investors, or offensive group of stocks…the ones that exist on a hope and a prayer of massive growth.

They usually pay no dividend, can trade at 100 times trailing earnings or more, and are expected to more than double earnings each year for the next 5 years or more. Offensive. And that’s how owners of them get when those stocks are crushed in a bad market. The Fed raises rates. A bomb goes off in an oil field. The President loses a high-stakes arm-wrestling match.

And all of the sudden the bull market is over. The masses are selling selling selling. Well, that 100 times a dollar of earnings growth stock promising wifi enabled fidget spinners and trading at $100 a share? It craters to less than half. Ouch...50 bucks a share and still expensive.

So what about that tortoise to this company’s hare? The big, dumb, slow-moving oil company. It grows revenues at GDP plus a percent in a good year. It won’t double earnings for 30 years or more. But it has—and will—pay a 6% dividend more or less forever.

Skittish Linoleum trades at 40 bucks a share and pays 2.40 a year in divvy. In a big, bad, ugly, awful market, sure it probably goes down a bit…2 bucks? 5 bucks? Maybe a bit more? But while Nervous Marble has gone from 100 to 30, Skittish Linoleum has gone from 40 to 35 in these bad 2 years of bear market-itis.

And it paid its $2.40 dividend each year, or $4.80 total, so even down from 40 at 35, if you add back the dividend, its down like 20 cents. Big whoop. Compare that to Nervous Marble. And every now and then it’s awfully nice to be the tortoise and…not the hare.