The first question I always get asked by newbie investors is focused around what share to buy.

Through some seminars I’ve held at university recently I’ve had the opportunity to gain valuable insight into how fellow students invest and what makes a share a buy for them.

But one thing has become clear – the last question newbie investors should ask is ‘what share to buy’.

Amongst these investors are several dreamers that think they’ll make it big by day trading or get rich quickly by buying and selling futures.

This is the first lesson on what share to buy!

When buying a share, look at it as a part ownership in a company with the intention of being a part owner FOREVER. Day trading and selling futures may appear glamorous but every investor I know has ended up losing a lot of money – it’s just too risky.

Now thankfully most of those I met were students that have worked hard for their money and just want to get some moderate gains in this low-interest rate environments.

Does this sound like you? Then keep reading!

If you are one of these investors then before asking ‘what share to buy’ there’s a few things we must learn and we’ll start with defensive stocks.

According to Investopedia;

A defensive stock is a stock that provides a constant dividend and stable earnings regardless of the state of the overall stock market. Because of the constant demand for their products, defensive stocks tend to remain stable during the various phases of the business cycle.

Doesn’t that sound great?

Instead of buying and selling every day/week/month and being worried that you were going to lose money you can buy a stock that will consistently reward you over time.
So how do I know if a stock is defensive?

Well, a simple phrase that I learnt early on is;

Eat, drink, smoke and pay the bills!

Eating: Consumer defensive stocks such as Unilever tend to hold up better than other stocks during recessions. After all, we still need to eat to survive.

Drink: alcohol consumption is addictive and people still tend to drink during recessions. This makes stocks such as Diageo solid, safe buys.

Smoke: Same as above. Unfortunately, even during tough times people just can’t kick the habit of consuming tobacco.

Pay the bills: If a bill lands on your door mat you have to pay it! This makes utility stocks solid buys. Everyone needs gas, electric and heating. Taking a look at companies such as General Electric and National Grid may be worth it to avoid declines.

There’s one thing I haven’t included in that phrase and that’s healthcare!

If people get ill then they will still buy drugs for treatment. Healthcare and pharmaceuticals are great recession-proof stocks because of this.

So, let’s look at some of my holdings;

Glaxo Smith Kline (GSK) – pharmaceutical stock. Even in recessions people still need medicine

Unilever (ULVR) – People don’t stop buying consumer staples in recessions and brands offer a great barrier against pricing pressures.

Cardinal Health (CAH) – One of only three drug distributors in the USA in an effective oligopoly

Altira (MO) – Smoking is addictive, people will still buy tobacco even when times get real tough.

By buying defensive, we can hold these stocks forever and GROW our wealth over time as these stocks produce moderate gains.

We are never buying and selling on a whim and we are never being kept up at night by the need to chart or trade.

We are confident that our part-ownership in these companies is secured and that they won’t go out of business when times get tough.

Therefore my answer to the question ‘what stock to buy’ is always;

A defensive one!

But this is just one lesson on what share to buy – This will become a weekly series, follow this blog for further posts.