When Trouble is Brewing, Buy this Type of Stock

War.

It’s the biggest fear facing stock markets today.

It’s the fear that Russia could invade Ukraine…and perhaps even Europe.

Not to mention the current flare-up in Gaza involving Israel.

And of course there’s still the potential for conflict between China and Japan over disputed islands and territorial waters.

Apparently, all this talk about war is reason to sell stocks and get into cash.

Quite frankly, if war really is on the cards, then it’s not cash we’re interested in. We’ve got other investment ideas on our mind…

Don’t get us wrong.

Cash should be a part of everyone’s portfolio.

You should always resist the temptation to put all your money in stocks.

Holding cash is useful for two reasons.

First, it helps protect your wealth from a rapid price drop in stocks.

And second, it means if stocks drop, you’ve got spare cash to buy cheap stocks.

But cash shouldn’t be your only protection against a stock drop.

Disaster protection insurance

We’ve long advocated gold as a great long term investment and ‘insurance policy’.

As far as we’re concerned, it’s the ultimate disaster protection asset. And what bigger potential disaster is there than war?

That’s why we say all investors should at least have some exposure to the metal. How much you own is up to you.

We recommend at least 10%. You could go as high as 50%. Personally, gold has been anything from 20% to nearly 50% of our total portfolio over the past 10 years. It’s now around 25%. We’ve never sold any, and we won’t.

The fluctuation is simply down to how we’ve allocated new capital (mostly shares since 2011) and the relative performance of gold and other assets.

But regardless of how much gold you own, importantly, you have to treat it as a long term holding. You can’t fuss around with buying and selling it to make short term gains.

But as tasteless as it may seem, there is another way to invest on the prospect of war.

Gold is great, but it’s not the best

Since 1999 the gold price has done well.

In US dollars, it’s up 406%.

In Aussie dollars, it has done pretty well, but not quite as well. It’s up 253%.

But gold isn’t the only way to potentially profit and/or protect your wealth when things get sticky geopolitically.

What about stocks?

Well, using the same timeframe, since 1999, the US S&P 500 is up just 44.1%.

What a dud.

On the other hand, the All Ordinaries is up 82.1% (the S&P/ASX 200 index didn’t exist until 2000).

So, gold wins, right?

Not so fast. That’s only true toa point. There’s no doubt that gold performed better from 1999 through to early 2003.

That period covered the 9-11 terrorist attacks and the invasions of Afghanistan and Iraq. It was also the period that saw the top of the internet boom, the resulting bust, and a US recession.

It’s no wonder stocks went down.

But what about the after-effect? That’s where the story changes.

When trouble is brewing, look for stocks like this

If we take late 2001 as the turning point, after the US invaded Afghanistan, you’ll see a different picture.

From that point on, the best investment wasn’t gold…or an index of stocks. Rather, it was companies with a direct involvement in profiting from certain aspects of war.

The classic example is Halliburton Company [NYSE:HAL]. Halliburton was one of the most controversial companies at the time of the Middle East wars due to the relationship between the company and then vice president Dick Cheney.

It just so happens that Cheney was CEO of Halliburton until 2000. Halliburton became a major beneficiary of defence and oil contracts in Iraq during and after the invasion.

But heck, shareholders in Halliburton probably didn’t mind the controversy. Over the next seven years the company’s share price gained 769%.

During the same timeframe, the gold price gained around 250%.

Today, Halliburton shares are up 1,045% since late 2001. As we mentioned early, the gold price in US dollars is up just 406%.

This is important. The papers are full of headlines talking up the fear of war in Europe — and possibly elsewhere. It makes sense to pay attention to this stuff.

But it doesn’t make sense to throw up your hands and let the mainstream con you into thinking that you need to panic.

If you’ve followed our advice for the past four or five years, it’s likely you’ll only have a maximum of 50% of your wealth tied up in stocks. Most of those should be strong dividend paying stocks.

The rest should be a number of speculative growth and small-cap stocks. Providing you haven’t gone crazy and over-exposed your portfolio to those stocks, even if those stocks fall by half, it should only have a small dent on your portfolio.

So, remember: When you see investors panic, you shouldn’t assume that you have to follow suit. The investors panicking are most likely to be the fund managers and hedge funds that almost always have too much exposure to stocks.

If you’ve played this market sensibly over the past few years, this should be your opportunity to buy rather than sell.

Our advice? Look at the market and figure out which of today’s stocks could rack up Halliburton style returns over the next 5–10 years — with or without a war.

Read the rest of this article at Money Morning