An Investing Strategy for Any Market

Despite the recent stock market recovery, the economy remains in deep trouble. Even President Obama effectively agrees, recently saying in a Bloomberg News interview “It’s going to take a long time” for a full-fledged recovery, as households work off the debt accumulated during the real estate boom. Obama also predicted unemployment would continue to rise, up from its current 25-year high of 9.4% to 10%.

Most economists are in agreement -- this 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 the rest of 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 Allied Irish Banks (NYSE: AIB  ) and Bank of America (NYSE: BAC  ) to continue their recoveries, or will big winners of the past 12 months, such as Green Mountain Coffee Roasters (Nasdaq: GMCR  ) and Shanda Interactive (Nasdaq: SNDA  ) continue to make hay for shareholders in the year ahead?
  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 Chesapeake Energy (NYSE: CHK  ) in anticipation of rising natural gas prices, or should you consider paring back a stake in Newmont Mining (NYSE: NEM  ) or Goldcorp (NYSE: GG  ) because you think the gold price is riding for a fall?
  7. Whether President 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. Deutsche Bank AG agrees, recently predicting U.S. home prices may fall another 14% before reaching a bottom.

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.

Cause for optimism
The economy is reeling. The stock market has been volatile, yet may now be heading into a largely flat period that could last for quite some time. 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.

This article was originally published on January 17, 2009. It has been updated.

Fool contributor Bruce Jackson is a member of the Motley Fool Pro team. He owns Chesapeake Energy, which is also a Motley Fool Inside Value pick. Green Mountain Coffee Roasters and Shanda Interactive Entertainment are Motley Fool Rule Breakers picks. Allied Irish Banks is a Motley Fool Global Gains recommendation. The Fool owns shares of Allied Irish Banks. The Motley Fool's disclosure policy is far from uncertain.

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Comments from our Foolish Readers

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 June 19, 2009, at 4:04 PM, crankly09 wrote:

    AIB is a winner, period. I've bought thousands of shares since the beginning of this year at a pps average of around $2.75.

    I'm going to keep buying as well!!

    Good luck to all,


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