In bear markets such as the one we are facing today, there are inevitably a number of safe investment opportunities where the returns of a given investment greatly outweigh the underlying risk. This happens because investors, quick to seek the stability of the safest assets, leave a number of relatively stable offerings which drives up returns for those who are smart enough to get in at the right time.
We can all take a note from the legendary investor Warren Buffet, who took the recent opportunities in the market to make investments in some of America’s most blue chip companies – General Electric and Goldman Sachs. Since investors lost trust in nearly every institution in the market, stable and unstable, even the best stocks took hits both in terms of their share price and in terms of their corporate parent’s ability to raise funds. As a result, Buffett was able to get good returns on investing in two stable, well run companies that have an impressive track record. Heading into economic uncertainty, there are a number of lessons we can learn from Buffet to apply to our own portfolios.
The question we should ask is not only what should we invest in, but also what shouldn’t we invest in. As a product of investor’s flight to safety, the asking price on Treasury Bonds has been driven up, which means the percentage return on those bonds has been driven down below 1% (the price and return varies inversely in the bond market). As a result, Treasury Bonds are seen as safe enough to justify a net negative return after inflation – since the economy will slowly recover, this probably isn’t a smart place to put your money.
On the other hand, there are some great safe investment opportunities to invest in the public sector. Local and state governments offer municipal bonds to fund everything from construction of highways to schools, and they offer increasingly attractive rates on long-term bonds. These bonds are safe, stable and pay a stream of income that makes them particularly attractive in today’s market. At the same time, highly rated corporate bonds from companies with stellar credit, such as General Electric provide an equally impressive investment opportunity for patient investors.
In the traditional stock market, there are a number of companies that continue to post steady, reliable earnings while paying out dividends quarter after quarter. By paying out dividends, the companies are signaling their willingness to return value to shareholders – this is an important sign of company health. Companies in this area include traditional utilities as well as large companies with a lot of cash on hand, including Microsoft.
As investors return to these stocks over time, their share prices will recover – as a result, you can earn returns both on the improvement in the share price while continuing to earn an income stream from the dividends which you can take as cash or re-invest for further shares. Patient investing, just like that followed by Warren Buffet, will leave you ahead of the curve when the economy starts to recover.