Recession Proof Investments

A few years ago, a good mate of mine was selling a load of cattle to one of the big retailers when their meat buyer had him bent over a barrel.

It was the tail-end of the drought when conditions were at their worst so he wasn’t expecting top prices for his stock.

Equally, he didn’t expect to get screwed over via a process of manipulation and game playing either.

He reckoned just before he acquiesced with their offer, he seriously thought about letting his cattle go just so they couldn’t have them.

It was the first and last time he dealt with them.

That’s the difference between a price taker and a price maker. The price maker has all the power.

Last week, Coles and Woolies started a price war with a ‘basket’ of one hundred groceries.

And then on Tuesday night, a spokesperson for Woolies said, “Aussie families are doing it tough at the moment so we want to give back!”

What?!

Who are they kidding! These people never give back unless there’s a decent drink in it for them.

I almost choked on my over-priced lamb chops when I heard that.

Here’s the truth.

Coles and Woolies have done extremely well from rising inflation and now they’re a tad nervous about how their stunning profit figures may look to their customers.

So, to help massage their image, they’ve started a PR (spin) campaign to convince their customers that the Fresh Food People are Big-Hearted People. Coles are no better.

For example, they’ve dropped the price of Iceberg lettuce from $12 to $2.90.

Meanwhile, the rest of their groceries are steadily climbing in price.

However, what Coles and Woolies won’t tell you is their suppliers are forced to absorb some or most of the price discounts. E.g. my mate’s cattle.

Here’s another truth you won’t like.

The big retailers, just like the banks, telcos and energy providers know most consumers are too lazy and apathetic to go elsewhere, despite our displeasure.

And that’s what makes them such great investments.

Meaning, the best investments are those businesses who sell products we consume on a daily basis because they’re essential to our survival.

They’re relatively low risk, high profit businesses.

e.g. we might cancel our gym membership when things get tight but not our power, gas, banking, telecommunications, or basic groceries.

Consequently, these types of businesses can keep hiking their prices, even in the worst of times.

BTW…this is one reason I’m not a fan of mining and resource stocks. They’re price takers not price makers, hence the reason their stock prices gyrate so much.

Again, like my mate’s cattle.

Last week I said we’ll probably head into a recession which scared a few readers.

The good news is, there’s no such thing as a bad market, only a bad strategy.

Inflation and interest rates can really hurt some investments. However, if you’re invested in ‘staple’ goods and services such as banks, telcos, energy and non-discretionary retail, you can do very well because of their pricing power.

Put simply, the better they are at taking money out of your pocket, the more recession proof they are.

And that’s why, if you’re invested in price makers instead of price takers during a recession, your portfolio won’t feel like it’s bent over a barrel.

Have a great weekend!

Adam

Back paddock – have you ever tried to envisage what a billion dollars looks like?

This might help. If you lay a million-dollar bills end to end it extends nearly a hundred miles. But if you lay a billion dollars end to end, it wraps around the Earth four times!