What You Need To Know About “Crisis” Investing
When trouble strikes, you can often find excellent investing opportunities…
Just think back to the financial crisis in 2008-2009 and all the bargains that materialized. Heck, there were even opportunities outside of the stock market (like real estate). Granted, hindsight is always 20/20, but even the best companies in the world were trading at historically cheap discounts.
This year, we saw the same thing play out back in March. When the Covid-19 pandemic hit, it looked like the world was coming to an end. But we only need to look back to history to realize that this was the perfect time to strike. (We took advantage of some of these opportunities over at Top Stock Advisor, and I hope you did, too.)
Why This Matters Right Now
Today it’s becoming tougher and tougher to find great companies trading at discounted prices. There’s a glut of stocks whose fundamentals simply don’t support their sky-high valuations. And despite new record highs in the S&P 500 and Dow Jones Industrial Average, there are plenty of reasons for concern. The S&P 500’s lofty P/E ratio and an outrageously high debt-to-GDP ratio, just to name a couple. Then, of course there’s the ongoing situation with the coronavirus, the Fed’s unprecedented monetary policies, the upcoming election, I could go on…
Now, I want to make something clear before I continue. I don’t know when the next crisis is going to hit. Nobody does. But you can be sure my subscribers and I will have some dry powder on hand when it does.
Whether you may know it or not, there’s a term for this style of investing. It’s called “crisis investing”. And it doesn’t have to happen when everything in the market (or world for that matter) is turning upside down, either.
You see, companies often experience their own crises. These often come in the form of scandals or other public relations disasters that prompt investors to dump shares, sending prices plummeting. Sometimes shares stay down for good reason, but other times shares only stay depressed because investors simply neglect fundamentally good companies after leaving them for dead.
If you can find a company that’s had its own internal, temporary crisis that’s caused its stock to tumble… It could provide you with the opportunity to swoop in and pick up shares at bargain prices — then you could make a fortune.
The Time To Buy Is When There’s Blood In The Streets
Sometimes that window of opportunity is slim. Take Wal-Mart (NYSE: WMT), for example. In 2012, shares of the retail behemoth suffered a small blow when news came out that it was involved in a bribery scandal. Shares tumbled roughly 9% in only three days.
Investors quickly realized that they overreacted. Wal-Mart wasn’t going anywhere. So they piled back in… but those that bought when others were fearful were rewarded for their contrarian view. Shares went on to rally 28% in only three months. And the rest, as they say, is history. Today, Wal-Mart trades north of $140 per share.
We’ve also witnessed how this sort of “crisis investing” can pay off with a company like American Express (NYSE: AXP). You may recall that American Express has actually survived a number of scandals throughout its history. The most prominent is probably the Salad Oil Swindle of 1963. (If you’re not familiar, look it up. I promise it’s a real thing.)
After the stock price had collapsed from the scandal, Warren Buffett stepped in and took a 5% stake in the company, on which he made a cool $20 million profit. (Then later regretted selling and bought more shares.)
When I first recommended shares of American Express back in 2016, the company wasn’t going through a scandal per se, but many investors considered it a crisis. American Express had lost its co-branding partnership with Costco (Nasdaq: COST). Investors fled the scene, essentially leaving American Express for dead. The stock tumbled 45%.
We stepped in and picked up shares for only about seven times its cash earnings. That was a valuation the stock hadn’t seen since the 2008-2009 financial meltdown. Since September, when we added this exceptional business to our Top Stock Advisor portfolio, we’ve been rewarded with a 56% gain.
There are numerous stories like this. However, not all have made the strong recoveries and proven to be lucrative investments like the ones above. The key to finding winners in this space is really pretty simple. When a negative event happens to a prominent stock, ask yourself… Is this still a great company? If the answer is yes, but the market is overreacting, buy and hold for the long haul.
Just think back to the 1987 savings and loan crisis, when the Dow dropped 22% in a single day… think you could have picked up some good deals then? Or how about the bear market of 1973-1974, when the market lost 45% in roughly 22 months — allowing Warren Buffett to purchase a stake in the Washington Post Company (NYSE: WPO), an investment that earned 100-times what he paid.
It’s for this reason that Buffett says “Be greedy when others are fearful…”
Keep this in mind when looking for “crisis” investments. By being “greedy” when others are “fearful,” you’ll be able to take advantage of these situations and be one step ahead of the crowd.
Editor’s Note: Jimmy just described the benefits to being “greedy” when others are “fearful”. But right now, we’re in a market full of greed.
That’s led to a “zombie” market full of companies with bloated valuations. And it’s also why our colleague Jim Pearce is hosting an online tutorial next week that you won’t want to miss…
For the first time ever, Jim is going to reveal an explosive trading tactic specifically designed to help you make massive profits during a “greedy” market like this.
He first developed this method while managing a $50 million portfolio of wealthy investors, and he’s been using it successfully for more than a decade to reap huge gains.