Value investor and financial guru Mohnish Pabrai compares the investment decision to a coin toss in which “Heads I win; tails I don’t lose too much.” I tip my hat to Mr. Pabrai, and I only wish I had thought of that quote first.
Unfortunately for his investors, Mr. Paulson did not apply the same logic. He loaded up on gold after it had already been in a bull market for the better part of a decade and had become trendy. And he bet big on financials even after watching what happened to them in 2008. He swung for the fences — and struck out.
Enough beating up on Mr. Paulson. We all make mistakes. To my everlasting shame, I went short gold at $1,200. (Thankfully I covered the short with only modest losses. Remember, “Heads I win, tails I don’t lose too bad.”)
The more important question is where to invest today. Where are those investments that offer great upside with only modest downside?
I continue to see a lot of value in prosaic “old-school” tech giants like Microsoft (NASDAQ:MSFT) and Intel (NASDAQ:INTC). I also like high-dividend consumer products and health care giants like Johnson & Johnson (NYSE:JNJ) and Pfizer (NYSE:PFE). All of these companies pay high and growing dividends, and all but J&J trade at single-digit P/E ratios (J&J is close; it trades at a modest 12 times forward earnings). All four could double from current prices and still be reasonably valued.
The downside? Not much from a business standpoint. Intel and Microsoft have some degree of exposure to the business cycle as consumers and businesses tend to put off new computer purchases during tough economic times. But neither is at serious risk of seeing its revenues fall or seeing its dividend cut. And Johnson & Johnson and Pfizer are about as defensive and recession resistant as they come.
The market has been rallying hard this week as investors slowly come to realize that maybe — just maybe — the world isn’t going to stop turning because of Europe’s sovereign debt issues. Use any pullbacks as an opportunity to accumulate new shares of solid dividend payers that you know can survive Armageddon. Heads, you win. And tails, you’re not likely to lose too much.