The fundamental truth right now is that the overall economy in Europe, the USA and Japan is weak and has some serious long term problems. But the connection between that and company weakness is not incredibly strong. Many companies have huge cash hoards, built up through the large profits they continue to make. Yes, the economy entering a serious downturn will hurt many companies. A railroad is going to lose some sales if retail sales decline (and so they don’t have to be shipped). Airlines (historically problematic companies to begin will) will struggle. Banks that pay exorbitant amounts to senior staff have trouble making money without handouts of taking huge risks that then result in more handouts once the risks fail (as usually a bad economy will expose the risks they have taken). Companies that can only do well based on large top line growth will suffer. But that isn’t all companies.

When you look at companies like Google, Apple, Tesco, Danaher, Amazon even Toyota I really don’t see many problems looking forward. They seem perfectly capable of staying profitable, even growing profits, even in the face of economic decline in Europe, the USA and Japan (if that happens: it is possible, but not certain – very low growth is possible). Companies that have very good prospects at staying profitable, even getting more profitable going forward are hardly the type of investment I want to sell. Especially not to put it in the bank and get 0%, or a money market fund and pay someone for the privilege of having my money.

The options for investing today don’t look so great. But I really don’t see any reason to be concerned about owning stocks that have good prospects to do well even if the quite a few large economies do poorly in the next decade. In fact I am happy to own them. Frankly the biggest worry I have is that the senior executives will loot the owners profits with exorbitant pay (this is not a worry at Toyota and less of one at Amazon). I would worry more about owning index funds in such an environment. But even as bad as things look now, I am not sure they will really turn out as bad as we fear – especially for many companies, for some yes, but many are well prepared for change).

And the prospects in emerging markets look incredibly good to me. Yes they will slow their growth a bit if the large economies stall, but I think it is foolish to avoid investments in China, Singapore, Brazil, Korea, India, Ghana, Malaysia, Indonesia. In fact that is where companies like Google, Tesco, Apple, Toyota and Amazon are going to be making lots of money. Emerging markets are volatile and the companies in them are too. This will continue.

You may recall the stocks I mentioned above, are in my 12 stocks for 10 years portfolio. I have no concerns about any of those stocks based on the last few months. In fact they are all even better investments today. Amazon’s stock price, I felt had gotten a bit ahead of the results (so even today I see some risk in it falling more, but the long term prospects remain great).

Apple will do very well and make lots of profits in the next 10 years, the stock is a good buy based on earnings today. The risk with Apple I think is mainly how much of the last 4 years is the result of a perfect confluence of events and how much is just the core earnings potential. I do worry a bit that they are just on a streak of years of everything going almost perfectly and there will be a decline (not to losses or even huge decreases in profits, just that profit growth is very hard and maybe even just sustaining 75% of the profits they have now is hard). I just am not sure what the expectations for Apple should be, but the risk reward looks good to me.

Google will make less if growth in the USA and Europe is less than it could be. But they will make profits. They will likely grow profits. The stock is cheap, based on current earnings. I have no worries about owning this stock: even if we have serious economic problems they should be very profitable. As an investor I can understand selling stocks that will lose money based on a new fear I have that the economic future is grim. I can even understand selling a stock where I still think profits will be good but not as strong because the cost of the stock is so high that it has built in expectations of growth that cannot be sustained any longer. I really don’t see how making those judgements about Google today make any sense.

I would avoid medium or long term bonds including municipal and US government bonds (TIPS, Treasury Inflation-Protected Securities, are an option when bonds are needed to balance a portfolio). I would invest in real estate (inflation hedge and with positive cash flow that provide better yield than other options). I would invest in high quality, “high” (nothing is really high now but say above 2%) yielding stocks. I would invest in energy (oil, solar, wind…). I can understand companies being sold that are significantly leveraged (even ones I own like ATPG) or in industries that are likely to be suffer (finance [these are likely to “suffer” mainly because even with the huge amount of continuing aid from governments, the executive “pay” (looting is a more accurate term) and past abuse and leverage is so high they can’t sustain there stocks], airlines, shopping mall owners…), or just that don’t have a strong balance sheet and business model to prosper even in tough times. For yield I would favor strong stocks, utilities, Intel… over bonds.

There are also lots of stocks today that seem like great investments today – where the likely profit more than justifies the risks. This is true both in companies where I see little risk at all (GOOG, Tesco [TSCDY.PK], INTC… especially at these prices) and those that I see risk, but the prices of the stocks are just great right now, making them risky but sensible investments for risk capital: ATPG, JKS, DEPO, FNSR to name just 4, of many). Each has different levels of risk and potential reward.

I really don’t understand why we have not seen more inflation. Owning the US dollar seems crazy to me. Loaning US dollars long term at the rates available seems even more crazy. The Eruo also is very questionable. The only sensible reason to me is that the alternatives are not great or are far too small (to absorb hundreds of billions to trillions of dollars). Also the countries with currencies that are much more sound don’t want them to rise and attempt to stop that from happening. I don’t trust this will be able to continue.

Owning real assets like real estate (housing and office buildings), agricultural land, oil, gold (though it seems very highly priced to me) seem like quite good options. As does owning companies that I expect to continue to make large profits even if the economies suffer from the fiscal irresponsibility and failure to promote capitalist (regulated) markets of the last few decades in the USA, Europe and Japan.

Related: Does a Declining Stock Market Worry You? (June 2008) – Stock Market Decline (Sept 2008) – Curious Cat Recommended Investing Books – Investing, My Thoughts at the End of 2009 – Are Municipal Bonds Safe?

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