An Investing Strategy for Any Market

The economy is in deep trouble. Pop down to the shopping mall, and you can see it -- the crowds are down at Gap (NYSE: GPS  ) , Abercrombie & Fitch (NYSE: ANF  ) and even Sears Holdings' (Nasdaq: SHLD  ) Sears stores. (It comes as no surprise that retail sales fell for a record sixth consecutive month in December.) Turn on the news, and you can watch it. Turn on the radio, and you can hear about it. Pick up the newspapers, and you can read about it.

Most economists are in agreement -- 2009 is going to be a tough year for the U.S. and global economies. It's somewhat unusual for economists to agree with each other, so perhaps this time they really are right. (Very few of them predicted the carnage of 2008, so it's possible they could all be wrong again … but I doubt it.)

Seven degrees of uncertainty
This year will be economically tough -- of that there is no doubt. But there is considerable doubt as to …

  1. How the stock market will perform in 2009.
  2. How long the recession will last.
  3. How deep the recession will be.
  4. Which companies will be the winners and the losers. For instance, is now the time for beaten-up companies such as Whole Foods (Nasdaq: WFMI  ) to begin miraculous recoveries, or will 2008 winners such as Dollar Tree (Nasdaq: DLTR  ) continue to make hay for shareholders in 2009?
  5. Whether inflation will take over from deflation as the economy's greatest challenge, and when.
  6. What will happen to prices on key commodities and precious metals, such as oil, gas, copper, coal, gold, and silver. So, hypothetically, is it a good time to load up on ExxonMobil (NYSE: XOM  ) in anticipation of rising oil prices, or should you consider paring back a stake in Peabody Energy (NYSE: BTU  ) because you think the coal price is going to continue to tumble?
  7. Whether President-elect Obama's stimulus package will actually work, or whether it will leave lots of shiny new roads and schools but at the expense of a budget deficit that ultimately forces a massive devaluation of the dollar; much higher taxes for us, our children, and our grandchildren; and a general devaluation of U.S.A., Inc.

I could go on. In a word, what we have is uncertainty. If the best economic and academic minds in the country don't know what's ahead, what hope do amateur economists like you and me have of accurately predicting the future?

None, although we probably have just as good a chance of being right as the experts do. These conditions are the worst since the Great Depression, so for many of us, we've never experienced anything like this before.

No shortcuts to wealth
I can't see the economy recovering before 2010 -- at least. House prices are still falling, and I expect them to keep falling throughout 2009. Many Americans are heavily indebted, and it will take them years, if not decades, to pay down and eventually clear their debts. This time, there are no shortcuts to wealth.

That's also true of the stock market. Although I envision the market being flat for 2009 -- still with periods of high volatility -- and possibly stagnant for a longer period, I am by no means trying my hand at speculation. Nor am I liquidating my current stock holdings.

Cause for optimism
The economy is reeling. The stock market is flat. Yet I'm still optimistic --because there is still money to be made in the market.

My strategy is fourfold …

  1. I'm generally buying large, solid, dividend-paying companies. Larger companies are generally better positioned to weather the economic storm, and as an added bonus, many are paying attractive dividends.
  2. I'm diversifying my portfolio across sectors, countries, and company size. More than ever, diversification is essential -- just ask anyone who had a portfolio full of banking stocks at the beginning of 2008.
  3. I'm using options to generate additional income. Selling put and call options, generally on larger companies, not only allows me to buy and sell shares at more attractive prices, but I also get paid a premium while I wait.
  4. I'm constantly feeding more money into the market. Many stocks appear cheap today, but in this market and this economy, anything can happen to share prices. By dollar-cost averaging, I’m hoping to take advantage of low share prices today and ultimately profit in the years ahead.

I expect this strategy to generate decent returns over the medium to long term, whatever the economy or the state of the market. The future is unpredictable and uncertain. Worrying about it is not going to help. Concentrating on your strategy, keeping things in perspective, and practicing patience is going to make all the difference.

The Foolish bottom line
Over at Motley Fool Pro, we are doing just that. We've assembled a portfolio of common stocks alongside put and call options, shorts, and ETFs. We are concentrating our efforts on picking investments that we think are uniquely positioned to prosper in tough economic times. If you'd like to join us in our quest to generate absolute returns on our $1 million of real money, enter your email in the box below to learn more. But hurry -- Pro is closing to new members next week.

Fool contributor Bruce Jackson is a member of the Motley Fool Pro team. He is currently holding ExxonMobil shares and is short call options in the same company -- something known as a covered call, a strategy we are using at Motley Fool Pro. Sears Holdings and Gap are Inside Value picks. Whole Foods and Gap are Stock Advisor recommendations. The Motley Fool's disclosure policy is far from uncertain.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 17, 2009, at 9:09 AM, chucky36 wrote:

    I think this is a great article and right on the money!

    Chuc

  • Report this Comment On January 17, 2009, at 9:26 AM, ISRGer wrote:

    Broad economic indicators such as the growth in our economy or the monthly trend in stock prices are not the best way to select stock purchases. Rather, a consistent and superior growth over at least two years in sales/revenues together with concentration on a superior product define superior companies in which to invest. ISRGer

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