Having Stocks In The Black Is Great, But Red Is My Favorite Color For Investing!


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.

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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.

Financial Freedom Monty Campbell

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Africa, Morocco - view of Erg Chebbi Dunes - Camel excursion in sahara desert

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Ready for more tips on how to achieve the free life? Check-out these articles from the blog archives below:

Did You Follow Warren Buffett’s Priceless Advice On October 16, 2008? You’d Be Rich If You Did!

The Stock Market Is About To Have Its Most Volatile December Since 2008…And I Couldn’t Care Less!

How To Have “The” Money Talk. Getting Your Financially Negligent Spouse On The Money Wagon!

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  • Bamajam87

    Blood in the streets was early 2009 when the world was on fire. S and p hit 600. It was ugly. And it was GLORIOUS!

    The patient investor made a lot of money that year. It might have been a once in a life time opportunity.

    In any case, it’s always relative, but I like to have rising unemployment and a recession brewing before I get excited about the market.

  • primepairs

    The man who said “buy when there’s blood in the streets”, one of the Rothschilds in the Napoleonic period, meant it literally.

    Buy when there is violent political conflict in the city. He didn’t say “buy the dip”.

    Note: definitely did not work in Russian Revolution and Germany.

    • Advoc

      “Buy when there’s blood in the streets, even if the blood is your own.” was the complete quote, at least that’s what is believed.

      It’s basically contrarianism in a nutshell. Contrarian investors are seasoned, knowledgeable and generally survive the long-haul. It’s an approach for those who can sustain loses on something for a fair bit of time. That is, able to see an investment through over a period of years, when the herd is moving in the other direction.

      • primepairs

        Contrarianism doesn’t in any way imply a timeframe or a tolerance for pain. Some of the of the greatest contrarians are the exact opposite.

  • lotha

    It is easy to recognize buying opportunities AFTER the fact. But not so much while it is happening. Why wouldn’t large funds eliminate all of the market irrationally buying up bargains at the slightest drop and taking profits whenever the price was too high? I’m sure they try to do that- and fail as we have more volatility than ever. The fundamental problem is that it is VERY hard to assign a fair value to a stock- because we don’t know the future. Is apple (AAPL) priced fairly today? If so did you buy it when it was half that price a year ago? If you think it is overvalued, are you sure enough to risk shorting it?

    • Richard

      You may not have the data to be able to tell if AAPL is fairly priced; I sure don’t. If you get the “big things” right — recognizing big bubbles and panic selloffs — you can get way ahead. Even if you only recognize them once in a while, and only put a portion of your net worth “at risk”, you can get fantastic returns. You don’t need to take risks on individual stocks or make moves every day, just wait for enough investors to do something dumb with a particular asset class and then do the opposite.

  • tomflor

    You can’t time the market in the sense that you can’t guess which specific day it’s going to be at its highest or lowest. You can’t guess which hour or minute is the very best time to buy or sell.

    But you can recognize when the market is offering an irrationally good deal (either buying or selling) and take advantage. You can recognize pretty good times to buy or sell. Somebody else might get an even better deal than you from time to time, but that’s OK; all you need to do is consistently get pretty good deals and you’ll be way ahead of others.