The Types of Companies to Invest In During a Crisis

During this crisis, access to funding is a problem because banks are in desperate need of capital and can’t take risks that in ordinary times would be prudent. As a result, companies that otherwise may have survived might not make it through if conditions continue to deteriorate for several quarters or even years. The intelligent investor is likely going to want to focus on companies that boast several characteristics:

• Good long-term prospects


• Little or no debt, especially short-term debt that will need to be refinanced


• Plenty of cash on hand


• High returns on equity that allow it to generate large gains on book value each year


• Products that are necessary (drugs, food, consumer staples, etc.)


• A disciplined management team with the experience to steer the company through the current market environment

The problems we are seeing haven’t been witnessed in generations. Unemployment now approximates 7.5% - meaning that 1 in 12 Americans who wants a job is without one – and that figure is expected to continue increasing as the ramifications of the week Christmas selling season hit home with retailers and other industries dependent upon core durables. In other words, legal, accounting, and advertising firms exist as a service to the bread-and-butter American economy (companies that actually bring tangible products to your door such as underwear, breakfast cereal, and your heart medication). As the core industries begin to struggle, the support firms are going to be the first hit. That doesn’t mean they can’t be great long-term investments, but you need to be aware of the dangers.

On the other hand, for those with the balance sheet, cash flow, and profitability to take advantage of the current economy, the long-term results will be spectacular. We’ve been buying up shares of Berkshire Hathaway at my family’s collection of companies, as well as opening new businesses specializing in everything from home accessories and décor to baby gifts. In the next few weeks, we’ll be opening a physical retail store in the Midwest specializing in high-end fountain pens and writing instruments such as $3,000 diamond-covered Montblancs and luxury watches. As others in this field pull in their activities, we can use the cash flows from our core businesses to design advertising campaigns to take market share.
That doesn’t mean we enjoy the current crisis – believe me, we’d much rather have avoided it. It does mean, however, that we are going to take advantage of the intelligent options available to us after decades of hard work starting from a garage (it’s cliché, but that’s how it happened).