Three Unique Investment Tips to Build Recession-Proof Portfolio in COVID-19 Crisis - Kalkine Media

August 11, 2020 08:34 PM AEST | By Team Kalkine Media
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  • Market downturns or recessions can be tapped as once-in-a-lifetime occasion to take gain from prudent investment decision.
  • Investors can employ the idea of extremes, tapping stocks of solid businesses in underperforming sectors along with industry leaders in outshining sectors, to wade through different market conditions.
  • While it’s not always good to imitate strategies of peers in equity space, cloning great investors can help investors evaluate the stocks that fall within their circle of competence.
  • Hunting stocks of high-grade entities trading at undervalued prices can be an attractive option for investors preparing a virus-proof portfolio.

The global economy faces a historic test as the black-swan event ‘COVID-19’ strokes fears of worst recession since World War II. While virus-induced recession can set off significant social and economic impacts, it can potentially yield some of the best opportunities for investors to build wealth in the equity market. Its all about whether you wish to ‘Quarantine your money’ or rely on the strategic ‘Tap-the-dip’ investment strategy.

While investing in a recession seems counter-cultural, legendary investors like Warren Buffett regards market downturns as once-in-a-lifetime occasion to buy fundamentally sound companies at reasonable prices. For instance, at the time when other investors were racing for exits in 2008 economic meltdown, Warren Buffett made substantial investments that paid off well over time.

With several stocks trading at undervalued prices, down markets offer a golden chance for investors to beef up their portfolio with recession-proof stocks of high-grade companies having durable competitive advantages, long-term sustainable profits and robust balance sheets. Such stocks are more likely to survive through recession and recover faster than their peers.

While recession presents rare opportunities to become wealthy, the key to success is to utilise tips and strategies that can deliver profits under sinusoidal market trends, but with caution.

Here are some unique tips for investors to wade through coronavirus-driven recession:

  1. Employ the Idea of Extremes

During recession, money flow tends to move towards industry leaders of outshining sectors, which hold the potential to perform better even after the contraction period ends. In the COVID-19 era, investors can possibly seek high-grade companies in technology, healthcare and fintech sectors, dazzling in current market volatility.

On the flip side, tapping stocks of solid businesses in underperforming sectors can help investors sail through the crisis even if the tide turns against outperforming sectors. Investors can perhaps look for hefty businesses in banking and tourism and travel sectors, carrying firm potential to recover once the economic revival kicks in.

While it sounds contradictory, a fusion of such businesses in the stock portfolio can aid investors to survive through varied market conditions. However, setting up an emergency fund for rainy days and escaping herd mentality appear instrumental to leverage the benefit of this idea of diversification. Besides, setting aside emotional drivers like panic and fear can support investors take rational and conscious decisions.

  1. Cloning: Track the Smart Money Flow

While it’s not always good to imitate strategies of peers in equity space, tracking the flow of smart money or cloning other great investors like Warren Buffett can help investors evaluate the stocks that fall within their circle of competence.

Mr Buffett followed the ideas of legendary investor, Benjamin Graham to form his initial investing structure. Besides, famous investors like Mohnish Pabrai and Charlie Munger have also harnessed the benefits of cloning for investing success.

The idea is to comprehend the decisions of master investors while avoiding blind cloning investment to mitigate losses in recession. However, investors need to be cautious of modifying their investment strategy in panic and abandoning years of investing principles in a haste while ending up pricing in already digested market news.

  1. Remember, Buy-Low-Sell-High Ideology May Still Work!

Though value investing strategy has lagged behind growth strategy over the past few years, the value stocks have proven history of outperforming the growth ones during market meltdown. Hunting stocks of high-grade entities trading at undervalued prices can be an attractive option for investors preparing a virus-proof portfolio.

With several stocks available at underrated prices, investors need to ensure the margin of safety in value stocks by purchasing securities trading considerably below their intrinsic value to make an investment decision with minimal downside risk. Evading false bargains, parking funds in diverse investment avenues and seeking well-managed players appear crucial to reap the benefits of value investing approach.

Although there is no guaranteed formula to become victorious in down markets, staying abreast with market movements and keeping a bird’s eye perspective can chart-out the way forward for suitable equity market returns over the mid-to-long term.

In addition to these tips, investors can incorporate the three D’s – Directives, Demystification and Diversification – to plan their investments amid current market volatility. By Demystifying varying factors driving capital markets, gauging Directives of the equity market and embarking on Diversification strategy, investors can sweep through COVID-19 storm despite pandemic slump.

While there has been official declaration of economic recession in the US by National Bureau of Economic Research, it appears to be the best time for market players in the equity space to rebuild/redesign their portfolio in a bid to capitalise on prospective investment opportunities. However, one needs to decisively handpick stocks in potentially appealing investment avenues embracing a mix of technical and fundamental approach.

SOurce: Kalkine Image


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