An integral part of my investment success has been about being in the right place at the right time. No, I’m not talking about timing the market. That’s a fool’s errand.
What I’m talking about is investing during bad times. When there’s blood in the streets. Indeed, my favorite investment color is red.
And that’s the favorite investment color of many successful investors. Buffett has famously said he wants to be greedy when others are fearful. And John Templeton is famous for saying: “Invest at the point of maximum pessimism.” In fact, the worse things are in the market, the better they get for intelligent investors.
Welcome To Opportunistic Investing
The common name for this type of investing is value investing. Looking for great companies trading at a discount to their true worth, either due to a temporary issue or a general market downturn. I like to call this style of investing “opportunistic investing”. You see, the conventional thinking of investing is “take your losses quickly and don’t let a profit turn into a loss.”
This sounds great in theory. In practice, it doesn’t work. In fact, most times it works in the exact opposite way. People sell when they should be buying, and they buy when they should be selling.
But not the investment greats.
During every collapse, there is a small group of very successful investors who don’t follow the herd. These savvy investors know exactly what to buy as they grab huge profits hand over fist. They invest when stocks are down, and when everyone only wants to sell.
They’re skating towards where the puck will be…
Wayne Gretzky, Canada’s greatest hockey player (and evidently also Canada’s greatest investment adviser), used to say that you have to skate to where the puck is going to be, not to where the puck is.
In other words, whether you profit from a stock investment depends largely on what happens to the company going forward rather than what’s currently happening to the company.
A Crisis is a Terrible Thing to Waste
Typically, the stock prices of businesses that suffer major problems get pummeled. As worried investors leave, they dump the stock in droves, sending the shares sharply downward. This can create a spectacularly cheap stock in relation to the true value of the company’s assets.
This is where a lot of money is made.
For example, Warren Buffett famously bought American Express after the salad oil scandal. The company granted loans secured against large quantities of salad oil only to find out that the borrower had faked the amount of salad oil it had. American Express’ stock dropped by 50% as the company took a $58 million loss.
Soon after, Buffett started loading up on shares. When the scandal passed, Buffett’s holdings had appreciated handsomely.
There are numerous modern examples of crises working out very well for investors who had the stomach to buy at the point of peak pessimism.
Do you remember the BP oil spill?
Investors rushed to the exits as soon as they realized that there was a large problem. BP’s stock sank from $61.64 at the start of 2010 all the way down to a low of $27 in June of that year.
Investors who had the courage to buy at a 50% discount to the previous high saw their shares increase to $44 by year-end, a rise of 63%. Even if you had bought before or after the point of peak pessimism, for example at a price of $35, then you would still have had a sizable 26% return.
“Sure,” you say. “It’s easy to look in the rear view mirror and see when was the best time to invest. But what about me doing this going forward?” The answer is: you can – precisely because most people won’t. It appears that most people are hard-wired for investment failure.
But not you. That’s why you’re reading this blog. So, how does a person take advantage of opportunistic investing? Here are three tips:
1. Dig your well before you are thirsty. It’s been said that luck is where opportunity and planning meet. With opportunistic investing, all the heavy lifting is done long before an investment is actually made. This means building your investment capital years ahead of the time when you’ll actually need it. For some, this will be the most difficult component of this style of investing, for it means that you will have a large pile of funds doing nothing for a long time. But if you wait to build capital until there’s an actual opportunity to invest, it will be too late. As Buffett says, if you wait for the robins, spring will be over. Start now. Build your investment capital. Be ready for opportunity. Remember, lady opportunity is nearly bald with only a patch of hair in front. So many have tried grabbing the opportunity when she’s leaving the room, they’ve pulled out all the hair in the back of her head. You have to be ready to grasp the opportunity when it comes to you. Dig your well now.
2. Do your homework. Waiting until there’s a major market correction to start studying stocks is huge mistake. It’s no surprise that planning requires homework. Build a home without doing a soil test and you may find that the foundation is unstable. Go up against a good opponent in almost any sport and the game will go better if you have taken the time to understand the competition and the game. While a description of how to analyze stocks is beyond the scope of this article, suffice it to say that you want to build your “buy list” of quality stocks you’d like to own, well in advance. If you’re not familiar with value investing or fundamental analysis of companies (balance sheet and income statement analysis), start spending time at the library to become versed in bottoms-up analysis of stocks. That’s exactly what I did years ago. A couple of good books for this are: “The Intelligent Investor” by Ben Graham and “Security Analysis” by Ben Graham and David Dodd. These books are not for the lighthearted. They are heavy, number-laden volumes that require patient reading. If the thought of spending your Saturdays reading books like this is oft-putting, remember this – to get what others have, you have to be willing to do what others wont do.
3. Be patient. Value investing is not for those who like to rush. Sorry, this is not a get rich quick method. Events that create buying opportunities for quality stocks don’t happen often. In fact, much of the value investor’s time is spent doing absolutely nothing. In baseball parlance, you stand at the value investing plate a long time before you actually get to swing the bat. But that’s a good thing – unlike in baseball, there are no called strikes in investing. Remember, there are millions of dollars surrendered each day in the market by people who are impatient. These dollars always make their way to those market participants who are more patient. Intelligence is good, but the market primarily rewards temperament. Take your time, study stocks to determine which ones you want to buy and then wait for the best times to buy them – when they are trading at significant discounts to their true value.
Lastly, with value investing year-to-year returns often look choppy. As they say, you’ll look wrong with value investing long before you will look right, as you’re typically buying when there’s blood in the streets and at the point of maximum pessimism. Remember, the goal isn’t to have the most consistent returns. The goal is to have the biggest returns and let them compound overtime. That is how the world’s richest investors became the world’s richest investors.
Be free. Nothing else is worth it.
Ready for more tips on how to achieve the free life? Check-out these articles from the blog archives below: