Total read time: 7 minutes
In this newsletter, I will share why I don’t panic in a market downturn. I sleep well at night, and my clients do too. I used my training in quantitative economics to make investments based on a thesis of how I see the world. The result is three proven, time-tested insights to protect your portfolio in recession and the next.
In 2009 I took responsibility for managing my client’s portfolios. I found it challenging to get explanations and action steps on the Great Recession from the institutional money managers I hired. So I fired them and began to use macro thematic insights to create a foundation of stability in my clients’ portfolios that could weather a stormy market.
Global Exposure through Property & Casualty Insurance Industry
In a recession, companies quickly lay off workers to cut costs and slash budgets across their business units like marketing and operations. Where they don’t cut costs, however, are the lines of insurance that cover the cost of settling lawsuits and protecting their assets such as plants, equipment, and real estate from human error and natural disasters.
This protection is in the form of property casualty insurance.
The BRICs–Brazil, Russia India and China are some of the most rapidly growing economies in today’s world. This has led to an explosion of commercial real estate development and residential home values that have never been higher!
New assets need new liability coverage.
The international financial markets are not as transparent when investing in global growth. It’s difficult to find publicly traded companies. However, this makes sense if you’re also looking for risk-managed exposure across borders because insurers like AON Corporation (AFL), Chubb Corp.(CB), and Arch Capital Group Incorporated(ACI) all do business in these countries.
Please also note why I didn’t mention healthcare.
Health insurance (health care coverage) is a cyclical industry. A health insurer’s largest policyholders are small business owners and corporations. When the economy expands, there is an increase in premiums through hires. When they lose premium and sales, layoffs decrease sales. Property & Casualty insures cars, homes, boats, commercial buildings, events, and other properties and assets are typically non-cyclical.
Real Estate Investment Trusts (REITs)
Health Care/Assisted Living
America has been aging for the last 20 years and assisted living facilities have rapidly developed across the country to meet this need. You’ll also find that they evolved into diverse facilities with various business models, locations, amenities, and specialized care, such as the disabled elderly and those with Alzheimer’s Disease as an example. You can invest in these facilities through a real estate investment trust (REITs), a publicly traded trust of pooled healthcare facilities where the rental income generated from these properties is paid directly to you, the shareholder. Omega Healthcare is one of the largest trusts whose price and rental income remain stable during recession cycles.
E-commerce & Warehousing
Another interesting play in the REIT space is to invest in warehouses that fulfill online orders. E-commerce was already becoming an integral part of our online user experience. Shopping on the Internet, on your phone, and at home accelerated delivery by the Pandemic lockdowns. In another dramatic paradigm shift, the remote work lifestyle was born. This also marks the beginning of The Great Resignation, where people demand more space and flexibility in their work schedules from their employers. Due to this movement, many commercial buildings in New York City have become residential properties. People no longer want to go to the office every day when they can be productive at home. JPMorgan Chase has shuddered hundreds of branches across the country during the pandemic, and they’re not likely to return.
With this said, I believe you will also find stability in the REITs market by investing in properties that are in the warehousing and fulfillment of online consumer products like Prologis, which has the largest e-commerce warehousing/fulfillment portfolio in the world.
“Household Name” Companies.
If you’re subscribed to my weekly newsletter Macro View™ I have spoken about redefining the notion of “investing in companies with products that you love and use everyday.”
Because that is not an investing strategy.
Instead you should think about investing in companies that everybody loves and knows, and as it turns out, those companies have tthe largest percentage of individual investors than any publicly traded company. If you’re managing risk, you want as little volatility as possible, and individuals who invest in companies that everyone loves. Because when people love the company they tend to hold on to its stock, and not sell it in a panic. This characteristic tends to cause the volatility (the up and down up and down frequency) to become less than other stocks, even in a down market. They’re also the first stocks to recover when the market rallies upward.
Because here’s the dirty little secret: volatility is often caused by institutional investors like corporate pension plans, insurance companies, state retirement plans, endowments, and large private foundations who when they trade, do so in large volumes that move the market in a noticeable direction.
I invested in Apple Computer at $6.96 a share in 2007 because I believed that the iPod was just one of many products that would come out of this company, and I believe that there was no other company like it. They also operate on a proprietary technology platform which made it hard to replicate, making their products projectively indispensable. By 2012 Apple stock was as high as $295 a share. I’ve also recently added Tesla to my portfolio. There’s a very large share of individual investors in that stock as well, and they have done two stock splits in the last 2 years, which I and my clients have benefited greatly from.
The growth in these sectors will continue to be strong in the foreseeable future, mostly driven by technology and growing global market share, which makes them long-term keepers in my portfolio. and Management’s ability to adapt to disruption.
Thank you for reading.
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