Nick McDonald

Getting started in financial markets

Nick McDonald: Crisis investments - not for the faint-hearted!

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Photo / Thinkstock
Photo / Thinkstock

Ongoing tensions in the Ukraine and signs of a slowing Chinese economy are the main concerns that the market has today. One might be deemed a 'crisis' by some, the other more of a 'concern' for now.

Not long ago it was North Korea keeping us anxious and it still pops up on the news radar as a potential threat most weeks. Not long before that, Europe was keeping investors awake at night with a specific focus on Greece and at times Portugal, Italy and Spain getting fair attention too (remember the PIG's?).

Over recent years we have seen market concerns from bird flu to corruption to dishonest directors to Ponzi schemes to bankruptcies to nuclear weapons, war and terrorism. I cannot list all of the bad events here, only the ones that have scared investors for one reason or another, often acting as a catalyst for market moves. Overall though, the markets recover from these jitters and they can provide opportunities at times for those not afraid to invest in a crisis.

Here are some examples of 'crisis' investments and lessons from those who benefited from them. :

Baron Nathan Rothschild - 18th Century

Have you heard the term "buy when there is blood in the streets"?

This statement was coined by Baron Rothschild and indeed he followed through with his own advice. Rothschild seized his biggest opportunity when hearing that the Duke of Wellington had defeated Napoleon at the Battle of Waterloo. He bought government bonds in a big way and his investment is considered among the greatest of all time.

John Templeton - Onset of World War Two, 1939

While Hitler was invading Europe at a rate of knots, the US was in midst of a depression and the world was in major 'panic' mode, a young John Templeton with barely a penny to his name begged for a loan of $10,000 which he was fortunate enough to receive.

He researched the US stock markets to find depleted stocks under $1 each then invested around $100 into 104 different stocks. These stocks did exceptionally well for him and by 1954 he started the Templeton Growth Fund. In the decades that followed Templeton made billions of dollars as a stock picker, often buying in times of crisis.

Buffet in 2008

Warren Buffet told the Wall Street Journal "You make your best buys when people are overwhelmingly fearful" after confirming to them that he made more than US$10 billion through investments amidst the panic of the 2008 Global Financial Crisis. Buffet starting buying companies like Goldman Sachs and Bank of America among others, providing billions in loans to struggling companies in a very similar manner to the government's own bailout programme.

The good news for the everyday investor is that Buffet claims any "average investor" could have done just as well if they simply had the nerve to buy when everyone else was selling.

Avoiding Panic Exits

Plenty of experienced investors and traders made money in 2008 stock markets worldwide, but many, many more lost it. Why? Because people typically panic after the event. Another legendary investor Peter Lynch says "the real key to making money in stocks is not to get scared out of them". He also has been quoted as saying "Why investors attempt to prepare for total disaster by bailing out of their best investments is beyond me. If total disaster strikes, cash in the bank will be just as useless as a share".

In 2008, people saw the market crash and they panicked after it had already happened, selling stocks and other good investments that just a few years later were hitting new highs again.

These crashes can leave scars on those who lost and they scare people out of the market for years to come. It is not uncommon in New Zealand for people to tell me they are still fearful of the stock market because of what happened in 1987.

For the not-so-faint-hearted, recent 'crisis' style events in places such as Cyprus and Greece have offered up potentially great opportunities. Equally, many of those with the resolve to buy cheap property in developed nations like the USA and UK while in recession, have started to benefit now as property prices begin to improve along with the economies. This is the tip of the iceberg; such events are unfolding around us all the time. Great stocks make significant declines on temporary bad news almost every day of the year somewhere in the world.

Crisis or panic investing is most certainly not for the faint-hearted, nor for the inexperienced. Pick the wrong crisis to invest in and things could go horribly wrong! However for those who have being scared into closing an investment too soon in the future, you may have a slightly different take in it the next time it occurs.

Nick McDonald is a New Zealander teaching everyday people how to trade the worlds markets via his company Trade With Precision.

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