Remember when your grandfather believed he was “investing” in the future by purchasing shares of General Motors? Back then there was an old saying, “What’s good for GM is good for America.” GM was the bluest of blue chips, a rock-solid company and a rock-solid investment that nobody had any reason to doubt.

But in our book, The Big Gamble: Are You Investing or Speculating? we exposed a lot of the false concepts and myths about so-called investing. We postulated that what you call investing, is really nothing more than pure speculation and in fact, nothing is safe. You need look no further than the financial news of the past few months to see the reality of those statements.

The term blue chip has lost its luster, and now we can’t even rely on “defensive stocks” to hedge our portfolios. Defensive stocks are those that represent the basic consumer staples like food, utilities, tobacco and health care. Defensive stocks don't have the flash and sizzle that the tech stocks did a few years ago. No, these are the slow steady plodders that avoid getting caught up in market giddiness. Regardless of the state of the economy, people still need to eat, drink, take their meds, use basic toiletries and household products, and heat their homes.

Of all the stocks traded on the major exchanges, 5,369 lost value in 2008, that’s 88% of the market listings. Among those, 4,407 were down 25% or more, and when you find a high-profile defensive stock like Coca-Cola on that list, all bets are off!


Defensive stocks have typically fared pretty well during extreme economic contractions, or at least if they do lose value, they don’t fall quite as fast and hard as the overall market. But nothing about today’s economic chaos is typical.


Families were already feeling the pinch of rising prices for food, utilities and unemployment. Then the financial market meltdown pulled the rug out from under them.


Now consumers are cutting back on health care spending from medical and dental appointments to prescription drugs. According to IMS Health, a market research group, the number of prescriptions filled in the first quarter of 2008 fell 0.5% and 1.97% in the second, compared with the same periods in 2007. Doctor’s office visits have fallen 1.2% between July 2007 and 2008. In a survey conducted by the National Association of Insurance Commissioners 22% of consumers said they’ve cut down on seeing a doctor because of the cost and another 11% said they've scaled back on prescription drugs to save money. Those stats translate into declining values on Wall Street and your portfolios.

The bottom line is, the current economic situation is making "defensive" stocks look a lot like stocks that are more cyclical. Pharmaceuticals are down 21% in the last 12 months, food manufacturers are down 28%, and overall grocery stocks are down 26%, with specialty chains faring even worse—Whole Foods is down 72% for the last 12 months.

Pepsi, which relies heavily on foreign sales, took an earnings hit as the dollar gained strength. A fluctuating dollar creates more risks for all multinational companies. Even utility stocks are getting hit: Water utilities are off by 34% and electric utilities are down 33%.

If you’re still hoping to load up on so-called defensive stocks to protect your portfolio, that ship has already sailed. In fact, the boundary lines separating the higher risk cyclical stocks from the tried and true defensive stocks have merged and things have gotten a bit topsy-turvy.

Of course, there are always winners in every scenario. The deeper the recession, the more consumers cut back, and the more appeal there is for shopping at the big box discount warehouses. Shoppers forced to change their buying habits, those who previously would never have set foot inside one of those places, were suddenly lining up for bargains.

The world’s largest retailer, Wal-Mart was reporting a 10% jump in its 2008 third-quarter earnings per share as the company’s sales jumped by that same amount. But they missed their fourth-quarter target miserably. As a sign of just how bad things are, on January 8, shares of Wal-Mart took a big hit losing $4.16, or 7.9% and closing at $51.15—down from a 52-week high of $63.17, although still higher than their 52-week low of $46.99.

And there are other market abnormalities. In the category of consumer-discretionary companies, those in which consumers often choose to defer purchases during hard economic times, one company is doing well—McDonalds. Now trading near its all-time high, McDonald's has risen above the fray, thanks to consumers’ need to downgrade to more affordable dining options. If and when McDonald’s goes into the tank, the rest of us will already be there.

You may be among the many who have lost big during this chaos. You may be frantically looking for advice about what to do next. If any of the financial experts claim to have a hot tip for you, be wary. Regardless of whether you want to add Wal-Mart, McDonalds or some other stock to your portfolio, it all boils down to this. You won’t be investing; you’ll be speculating. And nothing is guaranteed. Never has been, never will be.
This comment was posted by Jose Roncal, co-author of "The Big Gamble: Are You Investing or Speculating?" - For more information, visit www.financialspeculation.com