In a recession, business goes from bad to terrible.
Companies that sell soft drinks, hamburgers, medicines - things that people either cannot do without or can easily afford - can sail through a recession unscathed.
Companies that sell big-ticket items such as cars, refrigerators, and houses have serious problems in recessions. They can lose millions, or even billions, of dollars, and unless they have enough money in the bank to tide them over, they face the prospect of going bankrupt.
Many investors have learned to "recession-proof" their portfolios.
- They buy stocks only in McDonald's, Coca-Cola, or Johnson & Johnson, and other such "consumer growth" companies that tend to do well in cold climates.
- They ignore the likes of General Motors, Reynolds Metals, or U.S. Home Corp. These are examples of "cyclical" companies that suffer in cold climates.
- sell expensive products,
- make parts for expensive products, or
- produce the raw materials used in expensive products.
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