Is there such a thing as recession-proof?

Now that we’re in the midst of recession and approaching 2009 with breakneck speed, there’s no way to draw readers more surely than for investing publications to tout the merits of their “recession-proof” picks.

“Recession-proof stocks: Consumers may be skittish in this weak economy but they haven’t completely closed their wallets. Here’s which companies will benefit,” reads a headline on CNN Money.

“9 Recession Proof Stocks,” promises the Motley Fool to its readers. I’ll admit it – I too have become an investment writer who has thrown about the words “recession proof” to describe a stock I’ve liked this year… but those days have passed.

The truth is (and I’m sorry to say it) that the recession-proof investment is a myth.

What stocks have analysts been bandying about with recession-proof claims? CNN Money’s Paul La Monica talked about Apple (AAPL), Toyota (TM), and – are you ready for this one – Coach (COH) in an April article. Since then, the best performer of the three has been Toyota, only down 36%… not even the browbeaten S&P 500 has fallen so hard.

At the Fool, Joe Magyer took a more conservative approach, talking up the virtues of ampersand-riddled consumer non-cyclicals like Johnson & Johnson (JNJ) and Proctor & Gable (PG). Still, both companies are eating red ink since his article went to print.

What gives? If the best minds in the investment world can’t pick out recession-proof plays, what chance is there for the rest of us?

I hate to say it, but a “recession-proof” stock doesn’t exist. So I’m done using that word.

I mean, a stock immune to recession? That’s crazy; especially in the wake of the stomach churning volatility this market has shown us in the last couple of months. Now that’s not to say that there aren’t plays that can handle recessions better than others… PG and JNJ are actually great examples of stocks that have performed less horribly than the rest of the market.

Recession-resistant is what we should be talking about here. The issue isn’t a matter of semantics either… more on that in a second.

With the market anything but sane right now, less experienced investors are looking for safe places to put there money, and sage advice on how to do so. They turn to the advisors and investment writers of the world for guidance. And the fact is that “recession-proof” is a term that’s been used way too generously in 2008. After all, this is the year the game changed, a fact that even Variety had to point out in a column about slumping DVD sales in the once “recession-proof” adult entertainment industry.

For good or bad, “recession-proof” elicits a mental image among investors – that of a stock that keeps on chugging, maybe even flourishes, in a recession. The problem is that many pundits have ignored the fact that a real recession-proof stock should do well in the good times too.

Companies that clean up foreclosures have done great this year – after all, there’s been no shortage of work… but in a healthy economy, that business dries up.

Switching asset classes can be a good defensive move, but don’t think that it’ll shield you from the effects of a recession either. Even if you’re lucky enough to not lose money, you’ll still get smaller returns from investments like bonds or money market accounts.

Not even your savings account is immune – as interest rates keep getting slashed, so do the piddly returns you can expect from your stash of cash. Sorry, this one’s not recession-proof either.

That said, all is not lost…

When the going gets tough, the tough get defensive. Recession-resistant stocks (like those consumer non-cyclicals) may take a hit in a bad economy, but they’ll still do a good job of insulating your investments from the full force of things.

For medieval military strategists, a castle was one of the best ways to defend against an enemy onslaught that was too much to handle… it wasn’t enemy-proof, but it was a way to hold out while they waited for reinforcements. The same is true of your defensive investments… they’re a way to wait it out in relative safety until the tide changes, not a way to get on the offensive.

Even though recession-proof and recession-resistant sound a lot alike, there’s a very good reason to differentiate between the two. It’s a matter of offense versus defense. Simply put, as long as people think that their investments are immune to a bad economy (recession-proof), instead of resistant to it, people are going to get burned when things turn bad. Recession-proof investments aren’t a way to take an offensive position in tough times (not that there aren’t ways to do that, mind you), they’re a way to put your portfolio on the defensive and avoid matching the S&P’s less than admirable losses.

All of this doesn’t mean that you can’t make money in this market – in fact, many people have. What it does mean is that we need to rethink how we describe investments and how we approach stocks during downturns.

I’m done using the word “recession-proof” to describe stocks… from now on, it’s time to get defensive. Have any good defensive ideas for your portfolio? Feel free to share in the comments…