Research & development spending continues

I hope that everyone’s weekend was outstanding!

Waaaay back when the blog was in its early days I had said that strong, well-managed businesses typically behave in a rational way, even if their investors do not. That meant that there would be opportunities in a recession that did not exist in a boom. When the economy is in recession everything is cheaper: labor, raw materials, other businesses, etc. So I have been on the lookout for evidence that businesses are behaving rationally and there is good evidence of that. Hence today’s post.

The Wall Street Journal is reporting today that U.S. businesses, while they are cutting jobs and wages, are still spending on research & development (R&D). They specifically say:

“Wary of emerging from the recession with obsolete products, big U.S. companies spent nearly as much on research and development in the dismal last quarter of 2008 as they did a year earlier, even as their revenue fell 7.7%, according to a Wall Street Journal analysis. The sampling looked at 28 of the largest U.S. R&D spenders, excluding deeply troubled auto makers and the drug industry, where R&D spending is dictated by government requirements.

“Big R&D spenders say they’ve learned from past downturns that they must invest through tough times if they hope to compete when the economy improves. Many innovative products, from the iPod to fuel-efficient aircraft engines, were hatched during downturns. If past patterns hold, today’s spending may plant the seeds of innovations that triumph in the recovery.”

Interestingly, the second paragraph is almost identical to something I wrote back in the autumn. The secret to investing success and to business success can be summarized in four little words: “buy low, sell high.” So it’s nice to know that some businesses out there agree. An investment tip for everyone…

If you want to know who the strong businesses are, and that are good candidates for long-term investment are, then pay attention to which businesses can afford to spend big money in a down turn. That tells you that the business has solid: products, management and prospects. In fact, when I was buying stocks for the first time in 5 years recently, I was buying those businesses that have demonstrated over the last many recessionary months that they meet the criteria I outlined.

Here comes another post…

Jason