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In the darkness of current events we all need to retrench, reevaluate, and rethink our strategies (the three “rs” of survival). At the same time we need to start a methodical program for building a watch list of securities to invest in. If the financial signals are any indication, the market has already reached a bottom and now is the time to stick our toes back in the water. Certainly there are hundreds of bargain investments that should pay handsomely in the future. Of course it’s the timing that is critical, and that’s a tough one for any investor. But the possibilities lay right before our eyes and we must be ready when the starting gun fires.

Here is an unusual approach toward establishing a base for our investments. It involves hedging expenses. The shortened definition of “hedge” given by Webster’s Dictionary will do: A hedge is protection against loss. Several of your investments can hedge, or compensate, for your monthly expenses. For example, most people need banking services, but you can choose those few banks that will actually pay you in order to have your accounts. You can also buy stocks in the banks you trust, thus getting a double benefit. Similar hedges will work for the foods you eat, the clothes you wear, and the gasoline you use. Again, it is a matter of knowing what your true needs are and then investing according to these needs.

How do you decide what your critical needs are and if they correspond to the needs of others? You don’t need a financial advisor or a crystal ball to figure out which investments will prosper and which ones will fall through the floor. Work it out yourself by conducing “walkabouts” through the economy and through the financial information around you.

Walk through stores from the 99 Cents Only Store (NDN), Costco (COST), and Wal-Mart (WMT) to special apparel outlets, grocery stores, and fun places like Starbucks (SBUX) and Whole Foods Market (WFMI). Take side trips through industrial areas, automobile sales lots, trucking companies, railroad terminals, hospitals, museums, bars, and boutiques.

Take a notebook along and write down what people generally wear, what they eat and drink, where they work, where they like to hang out, and what they drive. Note what truckers and freight trains are hauling. Watch prices, what people have in their shopping carts, and what items and brands are on the shelves. Listen to what people say about survival and the building of wealth.

Wherever you go and whatever you see, ask yourself these important questions.

  1. What is here that I just can’t do without and, conversely, what can I do without? Ask the same question for people at large. What do most people need and what can they do without?
  2. What do people buy and what do they avoid? Where do you find lots of people?
  3. What things and services do all people require or are addicted to and what do most people disregard. What are the stupid ways in which people spend their money?
  4. What expenses do I want to hedge, what choices do I have, and how can I improve those choices?

Think about this exercise as a walkabout of moving averages. You can never be exact in your calculations, but on the average you can learn to rate what is valuable and needed by you and the majority of people and what is of low value or overpriced. Always think about what things will be like in the future. You’ll see what others see, but you’ll be able to make discriminations that are beyond most observers. The outcome of what may seem like a mundane exercise is actually crucial to your success. It will help you cut your expenses, manage your activities better, make better choices, get your money’s worth, and be more certain about your investments.

You will avoid wasting money; you will understand the economy from your vantage point, sidestep errors that others make, and in the end make more money and, I think, be more content. Couple these abilities with economic analyses that you encounter in newspapers and elsewhere, and your perspectives and insights will allow you to make intuitive judgments about good and poor investments. You will become your own financial advisor.

If the majority of your investment choices are correct, and if you invest for the long journey ahead, you have essentially hedged your own expenses. Buying into wireless services and using them, you have just covered some of your communication costs and stand to make a healthy profit. You can hedge with almost anything – the food that you eat, the gasoline that you use, the healthcare that you need, the transportation that you use, and on and on. Eventually you will make enough money with your investments to cover all your expenses and then some. At that point you are living free of charge. And you’ve done it simply by responding to your needs and the needs you see in others.

The lessons are clear: invest in basic needs, not in whims and desires, and the market will take care of you. There are tons of inexpensive and high-capitalized companies that may be down 30, 40, or even 50 percent or more, yet will recover their losses and realize a significant return as the market stabilizes and turns upward. Be glad for these companies – they may offer once-in-a-lifetime opportunities.

ALL THE ARROWS POINTS TO THESE STOCKS

When you invest in your needs you also invest in the needs of thousands and millions of others who share those same needs. The most important needs are part of our genetic makeup that in one form or another have existed as long as Homo sapiens have traveled the earth. The aggregate needs of you and others are what stimulate companies to offer products that you buy, thus generating a profit for the companies and a nifty return for you.

In summary, the walkabout helps you define and clarify personal and community motivations. Highlighting these in your mind will shift your attention to companies whose products and services can satisfy your basic necessities. After you find those companies that are dedicated to fulfilling basic urges of survival you are on your way for making selections that will not only hedge your costs of living but will also help you build your wealth, even in an unpredictable market.

When you search for relevant companies keep these criteria in mind.

  1. High cap companies with proven longevity.
  2. Companies that not only show increased earning over the years but that also pay dividends, preferably with inexpensive automatic reinvestment programs.
  3. Companies that are well-managed and strive for customer satisfaction.
  4. Companies that produce consumer staples or broad general public services.
  5. Stocks that have the potential for long-term capital gains.
  6. Low risk investments.
  7. Securities that are counter-inflationary or address infrastructure requirements.

Below are companies that seem to serve these criteria. Thirty companies are divided into ten sectors that the majority of people deal with... Your ultimate choices of companies depend on your own analyses and preferences. You probably can’t hedge for all of your requirements but you can select those areas and companies that you believe offer the most potential at a reasonable level of risk.

HEDGING YOUR BASIC NEEDS

Disclosure: Author holds positions in PG, SYY, JNJ, MCD, SO, GLD

Source: Investing in Basic Needs: Hedging Your Expenses