Avoid Positions That Cannot Make It Through A Business Cycle

A more defensive strategy that we use is to avoid those categories that dramatically outperform during one period and dramatically underperform in the next period. An example is bonds of companies with cyclical business profiles that are highly leveraged with debt. It is true that you can make a good profit with these types of bonds; however, your timing must be good. If there is any type of liquidity problem, you will have to take an extra hit if you want to liquidate such an investment when everyone else does - which will happen when the cycle turns downward. . Accordingly, when we purchase riskier bonds, we avoid those backed by companies whose operations are overly cyclical and could have a tough time making it through and entire business cycle.