If you've been investing in shares for a while you will no doubt be aware how quickly the market's sentiment can change and the corresponding speed in which financial markets can change direction. Once an investor comes to realise that he or she can never accurately predict these movements and that it is futile to even try, it can almost be like reaching investing nirvana. With this comprehension of the unknowable, investors can instead focus on what they can know, namely value.
Buying quality stocks which can survive and prosper though all the economic seasons is a smart "all-weather" approach to investing which can protect investors from permanent loss of capital. But buying quality blue-chip stocks isn't enough, it's also necessary to not overpay.
One of the reasons blue-chip stocks are so popular with investors is they possess key attributes which provide protection to investors against the downside risk of permanent loss of capital. These attributes can include comparative advantage, large market share, entrenched and sticky customer base, and lowest cost producer. Three companies which are particularly impressive on these attributes and which can all be considered solid "all-weather" stocks for a rock-solid portfolio are Brambles Limited (ASX: BXB), Woolworths Limited (ASX: WOW) and Wesfarmers Ltd (ASX: WES).
Brambles provides a cost effective service to its customers. By pooling containers and crates, Brambles can offer freight and logistics solutions to a customer for less than the customer could do it themselves. This creates a positive feedback loop for Brambles and a substantial competitive advantage which dissuades new entrants.
Woolworths runs such efficient operations that it is the lowest cost supplier in a market where price is very important to its customers. Woolworths in turn shares these cost saving efficiencies between both its shareholders and importantly its customers meaning continued rock-bottom prices which keeps their customer base loyal.
When it comes to retail footprint, Wesfarmers is a major force in Australia. With retail brands spanning Coles, Bunnings, Officeworks, Target and Kmart, its customer base is enormously diverse and in turn Wesfarmers' revenue and earnings base is diversified too.
Foolish takeaway
By utilising an "all-weather" approach to portfolio construction you will think about the foundations that you build your investments from. Buying quality, dividend-paying blue-chip stocks coupled with paying no more than a conservative valuation will protect you from the constant downside risks.
