Investing in Necessities

Investing in Necessities

Investing in Necessities

 

It’s an uncertain time for investors.  The political landscape in the U.S. is skating on thin ice, the European Union could collapse and the Chinese debt bomb, which is even greater than ours, could go off at any time.  Then there’s religious and racial divides with no end in sight that are causing what seems to be a daily terrorist attack.

On the political front, neither candidate inspires a great deal of confidence and the state of the economy and the stock market are tied to the election.  Historically, which ever party has the presidency will win  it again if the economy and markets are strong for the last three months leading up to that election[1].  In other words, starting now.  Conversely, if they’re weak, the party out of presidential power will win.  Oddly, it behooves the Republicans, who in theory are defenders of the economy, to do as much harm to it as possible.

As investors, it only makes sense to protect our portfolios.  I think one of the best ways to do that is to invest in necessities.  That is things people can’t live without, and buy them at a price below what they’re worth.

So what are they.  Necessities can be broken down into three categories.  The ones we absolutely can’t live without like air, water, food, shelter and love.  Now water, food, shelter and love are easy to invest in, and while you can’t buy air, you can invest in companies trying to clean it up.

The second category consists of things we can live without, but barely.  And without them there couldn’t be seven billion of us.  Things like energy, including fuel and electricity.  Fertilizer is one of the most necessary things on earth[2] and if we have food shortages, which is very possible, the price could quadruple.[3]  Others in a long list are healthcare, plumbing, transportation and education.

The modern era has brought us the third category; things we don’t want to be without, and it is by far the biggest.  Most people consider their televisions, computers, smartphones and the internet to be fundamental to a good life.  We have time on our hands and we need to be entertained.  Breaking it down further, almost anything that requires a battery requires lithium. More people have cell phones than toilets[4] and cars of the future are going to be battery powered.  There’s going to be a severely acute lithium shortage[5], so it’s something you should consider for your portfolio.

How about money and credit?  They’re hard to live without in modern society.  What about insurance?  As much as we hate paying for it, if you have an accident or a heart attack, you’d better have it.  Over eighty percent of adults drink coffee and alcohol[6].  While we can live without them, no one’s giving up their morning coffee or glass of wine with dinner.  Do you need a pet?  Of course not, but most of us have one.

The investor who recognizes the benefit of necessity investing better than anyone is Warren Buffett.  When you look at his company, Berkshire Hathaway’s stock portfolio, it’s loaded with oil, media, retail, bank, transport and credit stocks.  All things necessary in our modern world.  Buffett is known as a value investor, that is one who seeks to buy stocks for less than their true value.  When you look at necessity companies, many of them are value companies as well.

Another place to find necessary companies is in industry sector exchange traded funds.  There are ten sectors and the two most apropos for a necessity investor are healthcare and consumer staples.  It’s no surprise that these two are the best performing of the ten.[7]  The utility sector fits in our portfolio as well and this sector is up over 20% for the year.[8]  You have to have them.

Another good way to find investments is to break down your household fixed expenses and ask yourself which ones you’re going to do without.  Mortgage payments, PG&E, water and sewer, car payments, gasoline, insurance and credit cards.  If you can’t live without them, add them to your portfolio and at least use the dividends to help pay your bills.

If you don’t have the time or the resources to do the research to find necessity stocks, we’ve put together a list of categories that anyone can have.  Just call me at 444-9212 and I’ll see you get a copy.

 

Until the next time, we’ll watch your money.

 

 

Nicholas Bertell ChFC®

Financial Advisor

 

Opinions expressed are those of Redwood Coast Financial Partners, and are not endorsed by Summit Brokerage Services, Inc. or its affiliates. All information herein has been prepared solely for information purposes, and is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular trading strategy.

 

 

[1] Long, Heather, Clinton predicted to beat Trump, due to economics.  CNN Money, May26, 2016

[2] Advertising Age, The New Necessities: What products and services can consumers not live without, 11/14/2011

[3] CropNutrition, Mosaic

[4] Wang, Yue,  More people have cellphones than toilets, UN study shows, Time, March 25, 2013

[5] Els, Frank,  Charts: Giant gap between future lithium supply and demand, September 10, 2012

 

[6] Fernau, Karen,  Coffee grinds for the nation,  USA Today,  April 9, 2013

[7] Sector returns by year 2007-2016, Select Sectors SPDRs

[8] ibid

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