To repurpose an old television commercial: When Warren Buffett talks, people listen. Buffett is one of the world's richest billionaires and most successful investors. Much of the investment community follows his every move, looking to bring some of the Buffett magic into their own portfolios.
Buffett's moves are particularly interesting as the U.S. faces inflation plus fears of recession. Investors generally want safety in uncertain times. And Buffett, who's seen many flavors of recession, could shed light on where to find that safety.
But Buffett doesn't buy and sell stocks based on what's happening with the economy. He's an all-weather investor — choosing stocks that can survive all economic climates. That may be why he has 10% of Berkshire Hathaway‘s portfolio invested in consumer staples, a sector that's known for being recession-resistant.
Consumer staples defined
Consumer staples are essential food, beverage, household, and personal products. Examples are soda, eggs, milk, toothpaste, and detergents.
Consumer staples companies include retailers and manufacturers of these products. On the retail side, you have Dollar General (NYSE: DG), Walmart (NYSE: WMT), Costco (NASDAQ: COST), and their competitors. Consumer staples manufacturers include Procter & Gamble (NYSE: PG), Coca-Cola (NYSE: KO), and Kimberly Clark (NYSE: KMB).
Why consumer staples stocks are recession-resistant
A look at your own buying habits can demonstrate why consumer staples stocks don't tank in recessions. With inflation running hot, where have you cut back to make ends meet? You're probably spending less on things like electronics and designer clothes. You may have even canceled a streaming service or two.
But you are still buying toilet paper, deodorant, and bread, even as the prices on these goods rise. On top of that, you may have shifted some shopping to discount retailers like Walmart, in lieu of your more expensive local market.
Here's what it comes down to. People keep buying their staples. Demand for these essential goods doesn't drop off when the economy goes sideways.
Buffett's consumer staples stocks
Berkshire Hathaway owns five consumer staples stocks:
Where to find consumer staples stocks for your portfolio
Buffett's consumer staples portfolio is interesting, but you don't want to run out and copy it. Even Buffett himself would tell you: A better approach is to invest in what you know — specifically, the products, brands, and retailers that are essential to you.
This is easy to figure out, too. Look at your last grocery receipt. Cross off everything that's nonessential and see what's left. Or peek into your pantry and bathroom cabinets. Note the brands you buy repeatedly. It could be Colgate or Charmin, for example. If you see mostly generic goods, then where are you buying them?
You could also think back to the products that kept selling out during the Great Lockdown of 2020. (In my community, it was toilet paper, disinfectants, and chicken.) People stockpile the stuff they can't live without. And many of these staples are made or sold by public companies.
Spend a few minutes on this exercise, and it could reveal six or more recession-resistant stocks to consider for your own portfolio.
Recession defense, the Buffett way
Many investors use consumer staples stocks as a defensive strategy against recession. To follow Buffett's approach, though, you'd invest in defensive stocks you're willing to hold for decades. That's different from owning shares of Coke or Walmart temporarily because financial pundits are predicting recession.
In other words, play defense consistently. Manage to a risk level you can handle in all investing climates. Buffett has 10% exposure to consumer staples, for example, but you might prefer 5% or 15%. Whatever your number is, stick with it. That way, you won't be scrambling to adjust to every market shift.
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Catherine Brock has positions in Coca-Cola, Dollar General, and Procter & Gamble. The Motley Fool has positions in and recommends Costco Wholesale and Walmart Inc. The Motley Fool recommends Kraft Heinz and recommends the following options: long January 2024 $47.50 calls on Coca-Cola. The Motley Fool has a disclosure policy.