Investing in a Recession: A Stunning Chart to Help You Stick to Your Financial Plan

This post is designed to update our Chart for the Curious from January of 2021 Investing in Staples. In our piece, Staples vs. IT, our work contrasted the reliable profits and reasonable valuation of staples with tech stocks. The results were shocking.

The chart below shows that Consumer Staples, the stocks that make and sell groceries, diapers, and dog food have absolutely trounced the tech sector. Consumer staples have not provided the sizzling returns investors have come to expect recently. What they have provided is robust and reliable earnings per share, and healthy compound returns year over year.

Buying What You Need vs What You Want Wins Over the Long Haul

We believe that Consumer Staples are some of the best investments in a market so expensive it makes the internet bubble look cheap. While valuation is a horrific timing tool, any experienced investor knows that recessions and market crashes are inevitable. Unfortunately, we don’t possess the ability to time markets. KCR’s post, Bear Traders, makes the importance of capital preservation blindingly clear.

Yet the legendary investor Dennis Gartman recently noted that the implosion of debt in China fell under his “cockroach theory.” Specifically, there is never just “one” of anything. More trouble is coming.

Dennis went on to note that the shift from “bull to bear” has begun. But it will be a process. Regardless of whether you agree with him, we hope you will review the rest of this post as we think the time to reduce risk is now.

The chart above shows that staples have been “workhorses” for saving money over the long haul. We explained this in our paper advocating for investing in stocks that make stuff you need. More importantly, staples have been one of the best places to be when the stock market falls, as seen below.

The similarities between the run-up to 2000 and today are stark in our opinion. The chart below shows…

  1. Current Mania, Leftmost 2 bars: The performance of Staples vs. Tech in the run-up to today
  2. Dot.Com Bull, Next 2 bars: The performance of Staples vs. Tech in the run-up to the peak
  3. Dot.Com Crash, Third set of bars: Staples rose 23% while Tech stocks plunged -78%
  4. Dot.Com Full Cycle, Last 2 bars: Full cycle Dot.Com returns for both Staples and Tech

Summarily, during the Dot.Com crash Staples rose 23% while Tech fell -78%. During the Dot.Com Full Cycle from 12/31/1997 through 9/30/2002, you were up 2% in Staples and lost -29% of your money in Tech.

Consumer Staples Beat IT Through the Dot Com Bubble

We would not be surprised to see a similar pattern present itself in the coming months/years.

Today everyone is excited about all kinds of neat stocks. We believe that many of the expensive and loss-making stocks that are so popular today will leave investors with big losses. In contrast, staples are superb stocks during recessions and for long-term investors seeking reliable profits and income.

We have talked frequently about the dangers we believe exist in bonds today. With negative real yields, it is unclear to us if bonds will protect investors’ purchasing power going forward. We believe the 60/40 asset allocation model is under pressure at a time when 10,000 Americans turn 65 every day.

Build Wealth Safely with Staples:

Staples typically offer reliable dividend yields. This makes them great candidates for retirement accounts where that income can compound tax-free. We believe the fact staples are unusually cheap relative to the market makes these stalwart stocks that much more interesting.

If you are paying attention to markets today, you know about the crazy speculation in investing going on. In our brief write-up of legendary billionaire investor Seth Klarman’s book, A Margin of Safety, we quoted him as follows:

“The speculative urge that lies within most of us is strong; the prospect of a free lunch can be compelling, especially when others have already seemingly partaken.”[1]

That speculative urge to chase the “free-lunch” we are all hearing about has never been stronger than it is today. Avoiding that temptation is the key to long-term wealth creation and making sure your portfolio is recession-proof.

Research has documented the unfortunate tendency of investors to chase returns. Being human, we tend to react far too strongly to recent news. Here’s a simple but powerful example. In 2011, after the great crash of 2008-2009, investors were understandably terrified.

From October of 2007 through March of 2009, the market had wiped out over half of equity investors’ savings. By December of 2011, gold had risen over 100% while equity investors were still sitting on losses.[2] In 2011 Gallup asked investors what the best long-term investment would be. They chose gold.

There was no interest in buying S&P 500 index funds anymore. The euphoria over soaring housing prices that had characterized the run-up to the crash evaporated. Discussions about personal finances had shifted from “how much will I make” to concerns about having adequate money in an emergency fund.

Choosing gold as the best long-term investment in 2011 would prove to be a terrible decision. Since that time, gold has fallen -4%, while the S&P 500 has risen 398%.[3]

We believe recessions are inevitable. Stock market crashes have always happened post periods of elevated valuations like today. But you can prepare and protect yourself. NOW.

Consumer Staples Stocks to Buy:

Just like the unfortunate timing of investors on gold, we see the exact same thing in consumer staples stocks. In the depths of the 2009 crash and during the recent Covid crash, prominent magazines were filled with stories of “why to own staples”….at precisely the wrong moment.

This is basic behavioral finance. Investors have “recency bias” where they extrapolate recent events far into the future. We see the mirror image of this behavior today. Some of our punchier Charts for the Curious and Quick Takes have taken aim at the brazen excesses in markets today.

Some of our favorite topics include those touched on in a few of our Quick Takes. We discussed the casino investing app Robinhood. We did not flinch documenting the outlandish leverage being used in many LBOs. The inability of many firms to make interest payments on their debt despite record-low yields frightens us.

One of our research team’s favorite sayings is that “life’s bills do not come at market tops.” Today everyone is talking about which firm is going to be the next Amazon. SPACs are everywhere, and IPOs are coming at valuations that exceed what we saw in 1999. All of these firms are supposedly going to take (or create) vast market share.

In our view, investing in high-priced stocks promising future profits is no way to save for retirement. We have no idea if, say, Twilio will ever really be worth $60bn. But we believe Coca-Cola, Procter & Gamble, and our top-ranked staples stocks will continue to grind out profits and dividends.

Look, everyone has to make their own decisions about how to handle their savings account. KCR and its research team certainly are not here to tell you what is right for you. That is between you and your financial advisor. Our work is historically informed content based on best-in-class behavioral finance.

Unlike the many talking heads and pontificators who dominate network TV and have swept many newsletters into the intellectual gutter, we have not and will not bend. We will not start making up stories about disruption to justify stocks that lack profits or fundamental merit simply to “fit in.” Like some cleantech shares.

We recently put up a post showing that the stocks analysts liked the most traded at a 100% premium to the stocks they hated. As we showed, the stocks they hated were not just cheaper. They were also far more profitable and paid much higher dividends than the stocks they loved. Again, this is just basic behavioral finance.

We have studied the lessons of history. Read thousands of books. Our staff has run money and published material in the most venerated academic journals for most of their careers. This is not our first rodeo.

If you are looking for a team with a proven track record and a safety-first approach to investing, we would love to hear from you.

Please find a list of KCR’s Ranked Staples Stocks here.

What happens to the stock market during a recession?

KCR does not believe anyone can time markets.  We also get questions like the one above.  For the sake of clarity, recessions are designated with hindsight or, at best, defined as two consecutive quarters of negative GDP growth.  The point being that while Investopedia and others make generic statements like stocks fall in recessions due to slowing demand and falling profits, we are less willing to commit intellectual, much less actual, capital to such thought.  If we can’t identify a recession ahead of time does it help to think about contracting margins?

How much do stocks drop in a recession?

Look at 2020 with the Covid outbreak.  If you had been given perfect foresight and hear that a novel virus was going to break out, send the world into a lockdown and shut down the majority of services businesses in the US, would you have done the right thing selling your stocks?   The answer is obviously “no.”  In contrast, in 2007, if you had perfect foresight that the mortgage market was going to implode and there would be the discovery and disclosure of widespread fraud by many securities originators, would you have been right selling your stocks?  Yes.    The broader point here is even when given perfect foresight, it is often impossible to know if you should sell stocks in a recession.   KCR puts this type of thinking in the “market timing” category.

Are bonds safer than stocks in a recession?

Historically bonds offer investors significant protection in a diversified portfolio during market corrections.  In periods of economic contraction, investor preference can rapidly shift from equities and their occasional blue-sky narratives to the security of bonds.  As KCR wrote in June of 2020, our piece examining the traditional 60/40 Portfolio we observed that we felt bonds were merely adding to investors’ risks.   The thinking behind that view came from the simple arithmetic that underpins bond-holder returns.   During 2020, the Federal  bought trillions of dollars of fixed income securities and yields plunged to near-zero.   Investors would be wise to remember that, held to maturity, the most you can make on a bond investment is the yield to maturity.  As one KCR researcher is fond of saying “they call fixed income “FIXED” for a reason.”

KCR recognizes that many of these answers will be unsatisfactory.  Human beings have a natural affinity for certainty.  We all want to know how much do stocks drop during  a recession, but the answer depends on a complex set of variables that are beyond anyone’s forecasting ability.   This affinity for being given “an answer” is the reason HL Mencken once stated: For every complex problem there is an answer that is clear, simple and wrong.   KCR is dedicated to using data to put asset prices in historical context.  The voluminous academic research that underpins behavioral finance documents our collective error of going through cycles of greed and fear that result in opportunities and risks that can be avoided and exploited.   We are a fact based organization that is dedicated to giving investors the actual evidence based on historically informed and empirically robust data.   We do not make forecasts!

  1. As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade.  If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you.  KCR also offers a wide range of easy-to-use but sophisticated tools.  Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
  2. Kailash Capital’s sister company, L2 Asset Management, runs market neutral, long/short, large-cap, and mid-cap long-only portfolios with a value and quality bias.  L2 employs a highly disciplined investment process characterized by moderate concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all products is the beginning of what may be a long period where speculation is punished, and prudence and patience rewarded.
[1] A Margin of Safety, Seth A. Klarman, page 81

[2] 10.10.2007 – 03.03.2009, the S&P 500 fell 54%, by 12.31.2011 the S&P was still down 12% while GLD was up 107%, Bloomberg

[3] GLD is down -3.9% and the S&P 500 Index is up 398% through 10/22/2021


The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital, LLC and its affiliates (collectively, “Kailash Capital”) shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital. In preparing the information, data, analyses, and opinions presented herein, Kailash Capital has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital, however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction. © 2021 Kailash Capital, LLC – All rights reserved.

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October 29, 2021 |

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