Defensive Investment Strategy
Categories: Company Management, Econ
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.
Related or Semi-related Video
Finance: What is Defensive Stock?1 Views
Finance allah shmoop what is a defensive stock Well pretty
much everyone looks like a genius in a big bull
market right At least everyone who is invested in the
market and not just sitting there holding cash well in
a big bull market Every stock's going up everyone's making
money he invested or getting richer on the best investment
results of that bunch come from the aggressive investors or
offensive groups of stocks the ones that exist on a
hope and a prayer of massive growth They usually pay
no dividend that khun traded hundreds of times trailing earnings
or more and they're expected to more than double earnings
every year for the next five years or more Offensive
that's How owners of them get when those stocks get
crushed in a bad market Yeah well the fed raises
rates Bomb goes off in an oil field The president
loses a high stakes arm wrestling match Something like that
And all of a sudden the bull market is over
the masses air selling selling selling and well that hundred
times a dollar of earnings growth stock promising wifi enabled
fidget spinners trading at one hundred bucks a share atleast
it wass last month Yeah well it crater celestine Half
of that ouch Fifty bucks a share and still expensive
and trading down So what about that tortoise to this
company's hair The big dumb slow moving oil company How
about them It grows revenues It like something totally unexciting
like gdp plus a percent in a good year It
won't double earnings for like thirty years or more but
it has and will pay a six percent dividend more
or less forever And if you think about it while
skittish linoleum our favorite company like that trades at forty
bucks a share and pays two dollars forty cents a
year in davy in a big bad ugly awful market
Well sure it probably goes down a bit Two bucks
to thirty eight a share five bucks to thirty five
maybe even a bit more But while nervous marble has
gone from one hundred to thirty down some seventy percent
while skittish linoleum is gone from forty to thirty five
in these bad two years of bear market itis down
a few percent not too bad And meantime it's paying
its two dollars forty cents a year dividend steady so
you've gotten back four dollars and eighty cents in dividends
so even down from forty to thirty five If you
add back the dividend and you should know you're only
down like twenty cents and we're going to forget about
taxes here Big would compare that to nervous marble So
yeah that's a defensive stock when the trades at low
multiples of earnings and pays a big fat dividend and
generally does well when the tide goes out and shows
everyone else's you know not thing And so well there
Yeah but every now and then it's Awfully nice to 00:02:47.788 --> [endTime] be the tortoise and not the hair