Could you have better avoided the FTSE 100 crash? There will be crashes in the future, for sure. I think there’s even a realistic chance that we could see a second phase with a double-dip stock market crash now. So it’s never too late to ask.
I certainly don’t suggest we should abandon our long-term investing strategies just because we’ve had a tough few months. No, I remain convinced that a Foolish strategy already helps reduce the pain of a FTSE 100 crash.
But I have been thinking about focusing a little more strongly on what are often known as ‘picks and shovels’ stocks. But what are they? The name comes from the gold rush days, when huge numbers of prospectors went off in search of their fortunes. Some made it big, but countless others returned penniless.
But do you know who became rich with very little risk? Those who ran the stores and provided the materials for the hopeful miners. The clothing, the provisions, the explosives. And the picks and shovels.
FTSE 100 crash safety
What about similar companies that might offer safety in a FTSE 100 crash? Traditionally, it’s taken to mean those providing goods and services that other companies use. For example, the retail energy business is highly competitive. But every supplier of gas and electricity in the country simply has to use the distribution networks. And those are run by National Grid. If an energy firm or two should suffer in a FTSE 100 crash, National Grid will still have the business from the winners to keep it going.
There’s an example in the construction industry too. Infrastructure specialists are in a downturn, with large debts and tight cashflow characterising the sector. Undercutting on pricing to win contracts is a necessary part. But pare the potential margins too thin, and a project delay can put a company well into the red. The best example is Carillion, which failed in 2018 in the largest ever trading liquidation in the UK.
Bricks and mortar, literally
So instead of investing in construction firms themselves, buying shares in materials suppliers could be a lot safer. CRH is an example of one that’s been getting off lightly in the current FTSE 100 crash. While plenty of shares have slumped 50% and more, the CRH share price is down less than 15%. Or in the FTSE 250, I like the look of brick maker Ibstock.
I think we can expand the picks and shovels definition too. Including companies that don’t serve those at the sharp end, but instead aggregate their services for end users seems like a fair extension. I’m talking of, for example, travel agents like TUI Travel. The FTSE 100 crash has hit TUI quite hard, admittedly, but I think it’s a safer bet then investing in an airline directly. If an airline goes bust, TUI would just use the others.
End user services
Comparison firms like Gocompare fit the bill too. While our big insurers have suffered badly in the FTSE 100 crash, people are still buying insurance. And they’re using comparison companies to do it.
Ultimately, biasing your portfolio a bit more towards these picks and shovels is just, I think, potentially making a sound long-term investing strategy a little bit safer. I’m sure you can think of more examples too.
