Q&A, your way: Episode 9
In this episode we chat director of equity research Brian Han answers Lisa Romano's question about defensive investing strategies.
Nicola Chand: Do you have any questions that you would like us to ask that they would probably respond with in a video?
Lisa Romano: I would love to ask the specialists when they face a bear market as they do now, what is their defensive strategy and how? We'd love to know.
Brian Han: So, when people say defensive strategies, the first thing to note is that what they mean is investing in companies that provide essential services such as utilities and telecom, consumer staples and maybe healthcare services. Because no matter how the economy is doing, people still need their gas and electricity. They still need to take care of their medical needs, and they still need their food and their toilet papers. So, the earnings generated by these companies that produce these products and services, they generally hold up relatively well compared to companies that produce more discretionary services such as travel, hotels, and gadgets.
Now the second element to appreciate in a defensive strategy is that this notion of cash is king becomes even more important because instead of investing in companies that promises earnings growth way out into the future, people prefer companies that generate profits now that they can pay dividends from now, so that investors can take those dividends to the bank. But the final thing to remember about a defensive strategy, and perhaps this is the most counterintuitive, but perhaps the most important it is that in a bear market, the best defensive strategy is to invest. Because in a bear market fear takes over, bad news gets extrapolated, and most of those downside risks get very quickly priced into the market and the stock prices, and therefore, that often provides the best entry point for serious long-term investors. And history has shown over and over again that to be the case.