The Fine Art of Defensive Investing in Today's "Disruption Economy"

"The best defense is a good offense." - Boxer Jack Dempsey

I've always loved this Jack Dempsey quote - and with good reason.

It tells us that, when the chips are down, you don't sit back, "go defensive," and let events take control over you.

Instead, you take control. You go on the attack. You go on the offensive.

You adopt what I like to call an "offensive/defensive" investing strategy.

In today's "disruption economy" - where innovation keeps changing the competitive landscape - that's the only way to go.

And in today's issue of Money Morning, we're going to show you how this flavor of "defensive investing" can help you navigate this volatile pandemic market...[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]

To Do, and Not to Do

As a lifelong car guy, when I explain "defensive investing" to my Private Briefing followers, I liken it to "defensive driving": You're staying alert, heeding your surroundings, avoiding reckless behavior, keeping your distance from others' mistakes, and doing all you can to avoid a calamitous collision.

Traditional defensive investments and defensive strategies play the same role. You stay alert to your surroundings - and honestly assess the dangers posed by the financial markets or broader economy. You keep your distance from other investors: If everyone is piling into stocks you know are risky - like during the "dot-com" era, for instance - you stay back.

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You avoid reckless moves - like "take a flier" stocks. You "back the speed down," hold higher levels of cash (more on that in a minute), and invest in lower-risk plays like dividend stocks. And you're quicker to "hit the brakes" - perhaps by tightening your "trailing stops."

One feature of "defensive" companies is that folks need their offerings in good times or bad.

So we're talking about things like electricity. Food. Healthcare.

Traditionally, you shift to defensive investments during periods of uncertainty - when the economy's slowing, at the start of a crisis (financial/ health/ natural disaster), or when geopolitical tensions are spiraling. You're willing to sacrifice maximum "return" for more predictability, lesser risk - and a high probability that you'll get your money back.

The approach here - the strategy - is key.

Where to Look

Strategies here run the gamut. I have some favorites.

I like companies with good businesses and strong balance sheets - meaning low debt levels and lots of cash. In a recession - especially an extended one - these companies will keep their customers. They won't choke on debt service. And they have the cash to weather the storm, to maintain or boost dividends, and even to be opportunistic - perhaps building market share by purchasing rivals.

With $47 billion in "net cash," Microsoft Corp. (NASDAQ: MSFT) fits the bill here.

Drug companies, healthcare firms, and the "right" food companies can also be good plays. Right now, I really like ConAgra Brands Inc. (NYSE: CAG). Thanks to a shrewd deal it made two years ago, the company picked up some terrific brands that consumers can't get enough of right now. The deal also moved it into the promising "plant-based meat-replacement" market. And it pays a 2.5% dividend.

Remember my reference to today's "disruption economy"? You're talking about an era when many sectors can be supercharged - or even "leapfrogged" - by innovation. I'd argue that "payments" fits the bill - since folks have to buy stuff and pay bills in good times or bad. I really like Visa Inc. (NYSE: V).

Making It Work - for You

With any investing strategy, there are trade-offs. You gain something in one area, but have to sacrifice somewhere else.

Traditional defensive investing is no exception.

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In return for the heightened certainty these more-conservative holdings deliver during tough times, you'll give up returns during stronger-rebound markets. That goes for conservative "defensive" stocks. Or more-cautious strategies - like shifting to higher holdings of cash.

Perhaps it's my contrarian nature (remember, I co-authored a highly thought-of book on contrarian stock-picking) and my commitment to the long view, but I tend to favor a more "offensive-defensive" component to my "defensive investing" strategy.

In addition to the moves I've already described, I also look for new opportunities. I keep a short list of stocks I want to own. And when markets get rocky, I watch for chances to buy cheaply. Holding higher levels of cash - which is defensive - feeds into this "offensive-defensive" strategy perfectly.

I'm an ardent advocate of the "Accumulate" strategy - where you grab a foundational stake in stocks you like, and look to buy more on pullbacks or as you get additional cash.

As with any investments or investment strategies, you need to be sure anything you do is consistent with your goals, time horizon, and feelings about risk. And never invest in something you don't understand. No strategy will work if you can't see it through. And it's crucial to remember that it's the long run that matters.

If you're looking to get wealthy, that's where it happens.

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About the Author

Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press.

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