Retail investors have been warned not to buy into “defensive” shares, as they serve no useful purpose for long-term portfolios.
Marcus Today director Marcus Padley told subscribers to his newsletter that defensive stocks such as supermarkets and utilities don’t add any value in the long run.
Professionals only buy them because they need to constantly report on their performance, which incentivises short-term damage control.
“Defensive stocks will not serve you well at any time,” he said.
“Leave them to the fund managers that concern themselves with their own relative — not actual — performance.”
He took the example of A2 Milk Company Ltd (ASX: A2M), Fisher & Paykel Healthcare Corp Ltd (ASX: FPH), Telstra Corporation Ltd (ASX: TLS) and Woolworths Group Ltd (ASX: WOW) going gangbusters during the COVID-19 crash last March.
“They had a ‘moment’ of outperformance,” Padley said.
“But in the recovery they have been some of the worst performers.”
Losing less isn’t the goal, gaining more is
Padley said that the aim of investing is not to lose less during a correction — but to gain more in the long run.
And defensive stocks are antithetical to reaching that goal.
“For an individual investor there is almost no point at which you would want to buy a ‘defensive’ stock,” he said.
“They make less money in the recovery and there is no point holding the stock that loses you less money in a correction.”
You won’t predict the bottom, so don’t even try
Another reason to avoid defensive stocks is that no one is able to predict when the market has bottomed out. Therefore there is no way of knowing when to sell out of the defensive shares to put the money back into the recovery-positive businesses.
“Do not think you will be so clever as to predict the end before it happens,” said Padley.
“No-one knows when corrections are coming — and those that did, didn’t know for sure. They just made a fuss when they discover (in hindsight) that they made the right noises at the right time.”
Frazis Capital portfolio manager Michael Frazis said this week that it’s too simplistic to say the current share market correction is directly due to rising inflation and interest rates.
“Things ran really hot then they came back. I feel like that’s more the answer — it just coincided with a rise in interest rates and recovery,” he said in his podcast.
“The link is not one-to-one. It’s not like interest rates rise and stocks fall or vice versa. It’s much more complicated than that.”
But even if you took the simplistic view, Frazis contended it’s better to stick with shares with good long-term growth prospects.
“Any kind of recession or if anything goes wrong, those interest rates are going to come down very fast,” he said.
“If there’s a sharp fall in equities that coincides with that shock, the rebound in fast-growing tech companies will basically move irrespective of the economic cycle.”
This Tiny ASX Stock Could Be the Next Afterpay
One little-known Australian IPO has tripled in value since January 2020, and renowned Australian Moonshot stock picker Anirban Mahanti sees a potential millionaire-maker in waiting...
Because 'Doc' Mahanti believes this fast-growing company has all the hallmarks of genuine Moonshot potential, forget 'buy now pay later', this stock could be the next hot stock on the ASX.
Doc and his team have published a detailed report on this tiny ASX stock. Find out how you can access what could be the NEXT Afterpay today!
Returns as of 15th February 2021
Motley Fool contributor Tony Yoo owns shares of A2 Milk. The Motley Fool Australia owns shares of and has recommended A2 Milk and Telstra Limited. The Motley Fool Australia owns shares of Woolworths Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
- Little ASX software share to explode once everyone wakes up: fundie – May 13, 2021 8:54am
- This little ASX telco’s picking customers off the big boys: fundie – May 11, 2021 12:18pm
- Is good news bad news or is it actually good news? – May 10, 2021 8:56am