Strategy For A Recessionary Portfolio

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Includes: C, DNDN, F, MDT, XOM
by: James Stocklasar Thomas Jr.

How are you preparing for the next time the market falls below the recent dip of August 8, 2011? Some of course think that won't happen, but I beg to differ. I am pessimistic to the core. I think we are already in a recession, heading toward a much deeper market dip. Which means buying in the market has become even more riskier than it already is. So I've been thinking about, What is a good investment strategy for a recessionary portfolio?

First, you start by turning off the television
. If you watch television for your answers, then you will only get what is current within the last 24 hours with a spin to attract viewers. This not an exaggeration nor is any network "fair and balanced." Saying you are "fair and balanced" is only using reverse psychology. No one is fair and balanced, including this article. Everything comes with a bias and the television networks are all biased. Their hosts make millions off their gullible viewers who buy their books or subscribe to their websites. Every network is in an all-out war to get you to watch their programs. Not too long ago Ford (NYSE:F) and its CEO Alan Mulally were the favored company on one network inciting excitement in a special episode featuring the turn-around company combined with other programs with CEO interviews. Since then the share price has dropped. So much for television. The problem with television is it manipulates investor emotions. You are made to feel that either "the sky is falling" or "sunny days are here again." Remove the emotional element and you will become a much better investor.

Second, start reading and listening to contrarian viewpoints. If you must watch television, then change the channel and watch the network you don't like. The problem we all have as investors is people by nature want to read or watch what they want to see or hear. For example, I'm glad I dumped Citigroup (NYSE:C) at a loss despite the pumping of a talking head who must disclose which stocks his charitable trust is invested in to avoid legal conflict. Furthermore, this is particularly true of posting boards. Trumpet a stock, or what they call "pump a stock" and you will become a legendary hero who may acquire a following. State your conviction that "this stock will go to triple digits" and an army of faithful followers will grow to admire you because you stand for truth, justice and the American way. Then if you "dump a stock" and tell others, watch what happens. Immediately your following will turn on you along with so-called "bashers" waiting in the wings to pounce on the message board hero. They will call you a "shrill," a "criminal." They will threaten to report you to the SEC, and a few will write how they wish you were dead or that a tractor-trailer would run over you and drag you for miles with your face in the pavement.

Third, begin to critique what sources you listen to or read. I like SEC filings though they come with a company's bias if even subtle. Company press releases are very biased and usually quite shallow. If I have one major complaint against the majority of biotechs I follow, it's the thin reporting that spins the results of clinical trials (the design of U.S. clinical trials can be viewed here). The argument is readers are incapable of consuming so much information, but I fear the opposite. Companies revel in hiding the little details that ultimately show up with the FDA combs through the data and issues a negative response or tells the company its research is incomplete. The best option in biotech land is hoping your company will publish its results in a scholarly journal where the bar of submission is raised for the scientific community - and I argue this is what investors should be reading (e.g. Go to PubMed). Likewise, proprietary patents are available for anyone to read online, yet how few people seem to read them as the usual comment is made, "I don't understand all that stuff." But if you spent the time making the effort you might discover you are capable of learning (e.g. Go to FreePatentsOnline). Therefore, if you want to know what Dendreon (NASDAQ:DNDN) is up to, learn to use these resources on a regular basis.

Fourth, the only real protection in a recessionary environment is to invest or trade in the "creme de la creme." The only way to mitigate your investment risk, especially in a recessionary environment, is to limit your purchases to a short list of stocks that stand out. Some investors recommend stocks that pay dividends and that is a good strategy, but I think that view is also over-hyped as there are many good stocks that don't pay dividends but will reap the investor high rewards as the stock price climbs. Furthermore, a dividend paying company doesn't guarantee its stock price will go up. For example, Exxon Mobil (NYSE:XOM) has been on a steady decline since 29 April 2011 when it closed at $87.98. As of 2 September 2011, it closed at $72.14. But that aside, creme de la creme stocks do not include:

  • Sliding companies whose failed CEO just resigned
  • Dilution imminent stocks
  • Near bankrupt stocks
  • Reverse-split imminent stocks
  • Companies in non-compliance with the FDA or SEC
  • Companies in legal hot water
  • Companies with spurious data

There is nothing easy about identifying creme de la creme stocks. Today's trophy may be tomorrow's turkey which most likely will mean hours and hours of due-diligence and selling when you get it wrong.

Fifth, as a caveat to this article, regard Seeking Alpha as an opinion based venue where every writer has his/her own agenda. I see nothing wrong in making this point. As a private investor, I like researching biotechs that I'm interested in or I may or may not be investing in including the extra pocket change that comes with every published article. I have consistently complied with Seeking Alpha's policy that requires me to wait to buy or sell any stock appearing in an article until after 72 hours from the time of publication. Personally, abiding by that policy has caused me on more than one occasion to lose money because I had to wait to buy or sell. Nevertheless, I like Seeking Alpha's wide variety of authors because they are quite often contradictory, contrarian, or affirmative or what gets called "pumping" or "bashing." The difference I see in Seeking Alpha is it is not one flavor as other websites are more one dimensional with one or a few writers assigned to cover a particular sector. Therefore, the opportunity to read a contrarian article is diminished.

Sixth, stick to charts and financial metrics. Study a company finances by reading the SEC filings. What's the bottom line? Are they generating net income? Is there debt, and if so, does it appear manageable? By all means listen to a company's conference call. With Coviden (COV) I had the courage to email the company on a presentation day and I got to hear my question read and answered by the CEO. Frankly, I am shocked by the number of retail investors who do not call the IR/PR department to interview them with their own list of questions. Likewise, following analysts' reports covering a company can be useful, but don't press their estimates to hard. The list of metrics is endless but I like free sites like StockCharts.com (Go here) because it's very easy to use. I also like candlestick charts even if sometimes it reminds me of voodoo magic or reading a fortune cookie. Bollinger bands, moving averages, and RSI (Relative Strength Index) are good primers to learning investors.

Seventh, develop your own investment style. Some people argue the only way to invest is to diversify across multiple sectors. Personally, I've yet to see that strategy borne out in practice except for people who buy stocks for the wrong reason. If you've developed an expertise in a particular sector, better to buy and sell what you know, focus on the creme de la creme, rather than diversify across multiple sectors because someone thinks your trading strategy ought to mimic a mutual fund. If you like the financial sector, all well and good, but why diversify into a sector for the sake of doing it if it's getting hammered by the market? In a recessionary environment, it's more important what you buy compared to how you diversified your portfolio. If the market goes down, diversification won't save you, but investing in creme de la creme stocks will ease the pain.

Eighth, there is no more merit in holding a stock long-term, then trading it short-term. The key is, What is your price target? At which point do you plan to sell? Too many retail investors have been taught that holding long-term is what good people do, and retail investors who trade short-term are bad people. In reality, the issue is amoral; good investors make money; bad investors lose money. It's not "how long do you hold a stock?" It's "did you make money?"

Finally, if you're convinced the markets will go down, then don't be afraid to go into cash. Averaging down is another strategy, but the more cash you have, not only will you have protected your money, you will have more to reinvest. Some people will argue uphill and downhill to stay in the market as if you'll receive a medal of honor. Baloney! What you'll get is a good shellacking if the market drops and you are down by 25% or more. My point is: Why stay in the market if your convinced it's going to drop below 8 August 2011? Unless you're a day-trader who can move in and out, why not sit tight and let the market come to you?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.