Running an Offense or Defense?

It’s not a secret that the latest gross domestic product (GDP) numbers were poor. It is more likely than not, that when the GDP is revised as more information becomes available, that it will be reported that the numbers were worse than first stated. Stories are now beginning to appear indicating that the second quarter may also not prove to be as robust as previously predicted. I won’t pretend to guess, however; the numbers are certainly not what one would expect from a recovering or strong economy.

With further reports of Europe slowing slipping into a deflationary mode, the central banks around the world appear to be ready to print money at an astounding rate in order to bring to us the prize that they most treasure, that of inflation. Be careful what they hope for.

Many are also hoping that the United States will avoid recession, but only time will tell if we slip into more economic doldrums. There are many factors which point in that direction, however; there are some factors that point in the direction of positive, if slow growth. The truth is, the best or worst of economists do not know for certain if and when these events may take place.

Warren Buffett (Trades, Portfolio) often provides us with words of wisdom to see our way through these times and teaches us how to keep things in perspective. Buffett has come under much criticism lately, mostly in regards to his position with the board at Coca-Cola (KO). Truthfully, I believe much of it is well deserved. With that said, I would caution readers and those that disagree with his position with Coca-Cola and with his supposed political leanings, to not discard the Buffett and Munger's wisdom because you disagree with one or two things they’ve done or said. If one decided to casually toss away what that team is capable of teaching investors, we’ve forfeited a great deal of wisdom. Get over it already.

The intrinsic value of their experience and wisdom is always cheap and a good buy…even during recessions. The wisdom passed on to us is like a great company with a steady growth of free cash flow. Soak it in and learn from it.

Says Buffett:

“Charlie and I haven’t the faintest idea where it goes next week, next month or next year. We are not in that business. It isn’t our game. We see thousands of companies priced every day. We ignore 99% of what we see. Every now and then, we find an attractive price for a business”.

No one, the economists or the greatest of investors, knows with absolute certainty how the markets will play out.

All that said, it is nearly impossible for anyone surfing the net to not come across an article entitled, “The 10 most recession proof stocks”, “The 11 most recession proof stocks”, “5 stocks you must own during a recession”, “The best defensive stocks during a recession”, etc.

What does it all mean? Why 5, 10 or 11 stocks for a protective portfolio? Is there such thing as recession proof or recession resistant portfolio? Can one truly adopt a defensive position? Is there such a position one can take to protect themselves in all situations?

Summarized below, are what I believe investors really want in an uncertain market that very well may lead us into to a recession:

1. They want a portfolio that will go up when things go bad.
2. On the other hand, they want a portfolio that will not go down when things are good, providing them with a decent return.
3. Oh, they also don’t want the market to go up while they are waiting in cash to buy some great stocks at cheap prices if the recession does hit.

In other words, they want a perfect portfolio that will do all things at all times, always making them money. Reality states that no portfolio is perfect, not Warren Buffett (Trades, Portfolio)’s, not Seth Klarman (Trades, Portfolio)’s….any of them. And certainly not mine.

The best defense is to have a plan. Surround yourself with the very best of companies that are financially strong that can weather any type of economic disaster. It’s ok to buy the old stodgy slow growing stocks such as Coca-Cola (KO), Pepsi Holdings (PEP) and many others that will come to mind. Sorry for the “stodgy”. Don’t be afraid to diversify, but don’t “deworsify”. Some of these companies may not return the 15% that you desire, but a regular dividend and a smaller return is perfect in an unknowable investing universe.

While everyone likes to look at lists of those companies that perform well in difficult times, we must always remember that past results are not indicative of the future. A company that has fared well may not do so well in the next downturn.

So, while I am not suggesting that you buy any of the following stocks and that you should always perform your own security analysis, below represents some stocks that investors should want to keep around..…especially during a possible downturn.

1. Walmart (WMT, Financial)
2. Johnson & Johnson (JNJ, Financial)
3. McDonalds (MCD, Financial)
4. Exxon Mobil Corp. (XOM, Financial)
5. Lockheed Martin Corp. (LMT, Financial)
6. AutoZone, Inc. (AZO, Financial)
7. Nestle SA (NSRGF, Financial)
8. TJX Companies (TJX, Financial)
9. General Mills (GIS, Financial)
10. Altria Group (MO, Financial)

The very best advice comes from another top investor. He states it as well as anyone and you could do no better than to follow this advice.

I cannot underscore enough, the importance of the following quotations from investor Bruce Berkowitz (Trades, Portfolio) of Fairholme Capital Management who says:

“We look at companies, count the cash, andtry to kill the company. . . . We spend a

lot of time thinking about what could go wrong with a company, whether it’s arecession, stagflation, zooming interest rates or a dirty bomb going off. We try every which way to kill our best ideas. If we can’t kill it, maybe we’re onto something. If you go with companies that are prepared for difficult times, especially if they are linked to managers who are engineered for difficult times, then you almost want those times because they plant the seeds of greatness. “ (emphasis mine)

Berkowitz further provides a list of ways in which:

“Companies die and how they’re killed. Here are the ways you implode: you don’t generate cash, you burn cash, you’re over-leveraged, you play Russian Roulette, you have idiots for management, you have a bad board, you ‘de-worsify,’ you buy your stock too high, you lie with GAAP accounting.”

It’s simple, buy the very best.

Disclosure: Long: WMT, JNJ, MCD, XOM, LMT, AZO, NSRGF, TJX, GIS, MO