Bodiam Castle was erected in 1385 in East Sussex, England. Unlike most castles of its era, it's never been attacked in its entire history. That struck me as a great metaphor for us investors -- after all, shouldn't we want our portfolios to be Bodiam Castles, full of securities that will hold up no matter what the economy does? As someone who lived through the Great Internet Bubble of recent years, seeing many of my holdings shrivel up in short order, that sure sounds good to me.
So what would make up a Bodiam portfolio? Well, here are some possibilities:
- Dividend-paying stocks. As long as the underlying companies are healthy, even if the economy treads water for a few years and the stock slips or stagnates for a while, you'll still collect your dividends. Then, when the stock begins appreciating again, you'll enjoy the one-two punches of capital appreciation and dividend payouts. Companies recently offering yields greater than 3% include Carnival (NYSE:CCL), Bristol-Myers Squibb (NYSE:BMY), and Heinz (NYSE:HNZ).
- Defensive stocks. These companies operate in industries that can weather economic downturns. For example, if we enter a recession with high unemployment, many folks will be less eager to part with their dollars. They'll put off buying big-ticket items, so automakers and appliance manufacturers will suffer, but they'll still buy food, beverages, medicine, and utilities. Companies such as Pfizer (NYSE:PFE), Kraft Foods (NYSE:KFT), and PepsiCo (NYSE:PEP) would fit this bill.
But wait ...
A little more research into Bodiam Castle quickly taught me another lesson: You shouldn't believe everything you read or hear. And even if you do have all the facts, the first conclusions you draw may not be correct. Despite its history, Bodiam Castle may not be the best example of an invulnerable fortress. The castle's walls are reportedly only a couple of feet thick, and the building didn't even have gun-ports on its towers until later in its life.
Why, then, was it never tested in battle? While we might have chalked it up to superior construction, let's face it -- it might also simply have been pure luck.
Revisiting Bodiam portfolios
Our new take on the castle should lead to a new take on our impenetrable portfolios, too. Because if you want to give your portfolio a fighting chance of growing significantly over time, there's no way it can be impenetrable. Dividends get reduced or eliminated sometimes, and even food and drink companies can see their stocks go nowhere for a bunch of years.
Still, that doesn't mean it's pointless to try to build a bulletproof portfolio. Seeking dividend-payers and defensive stocks is still worthwhile, and adding undervalued stocks to that mix can make your portfolio even sturdier.
If you buy into an undervalued stock, you get a margin of safety against future declines. Sure, some stocks that have dropped will keep falling. But if a company's troubles seem temporary and fixable, you may well be looking at a future turnaround story, with years of gains ahead of it.
It's tempting to buy highfliers, hoping they'll keep flying. But if they've gotten ahead of themselves, it's not unreasonable for them to fall back to earth, at least a bit. Seeking undervalued stocks is more conservative and often more rational and promising.
Seeking out undervalued firms is a smart way to make your portfolio less vulnerable to downturns. And if you're lucky, you'll end up with investments that are both lovely to look at and fairly sturdy, too -- just like Bodiam Castle.
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