Bear market investing

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15. Bear-proofing - sectors that historically do well in bear markets

A common way to assemble a 'defensive' portfolio of shares is use sector analysis:

• Identify sectors in which the product or service is a basic necessity rather than a discretionary or luxury item.
• Select the companies in those sectors which have a strong market position and sound financial position.

The second part of this process is as important as the first. It's not enough to invest in the right sectors if the companies you choose face powerful competition, or if they are in a weak financial position.

The definition of basic necessities should be a fairly literal one. Food, water, heat and light qualify, but designer clothes and luxury holidays don't. Focus on 'need-to-have' items rather than 'nice-to-have' ones.

Sectors that have historically been proven to do well in bear markets, either rising in price or falling appreciably less than the market as a whole, include:

• Soft drinks companies
• Major pharmaceutical companies
• Food producers
• Major oil companies
• Basic household products companies
• Incumbent telephone companies
• Tobacco manufacturers
• Electric utilities

Source: Leuthold Group, Minneapolis

Whether or not history repeats itself needs to take into account some element of common sense. Some of the UK companies are currently heavily indebted as a result of paying for 3G mobile phone licenses. Equally, the suggestion to buy drug stocks should be taken to mean major conventional pharmaceutical groups, not risky biotech outfits. And so on.

The real point is that people will continue to eat, drink, drive cars, take medicines and make phone calls even if they are short of money, whereas they may not buy a new car, move house, buy a new computer or washing machine until better times seem to be on the horizon.

1. A word on bears 2. What is a bear market? 3. Why do bear markets happen? 4. How to spot the appearance of a bear market 5. How bear markets end 6. Bear market investment options: timing the market 7. Bear market investment options: the asset classes 8. Stocks: blue chips vs small caps 9. Bonds 10. Property and gold 11. Cash 12. Stocks: general principles 13. Bear-proofing - low 'beta' stocks 14. Bear-proofing - high yield shares 15. Bear-proofing - sectors that historically do well in bear markets 16. Bear-proofing - sectors that historically do badly in bear markets 17. Bear-proofing - key ratios for selecting stocks 18. Bear-proofing - investing in stocks you know and can support 19. Bear-proofing - pound cost averaging 20. Recognising the revival - a check list 21. Conclusion

• The Bear Book
• Stan Weinstein's Secrets for Profiting in Bull and Bear Markets
• The Great Crash, 1929