oil-filled ocean 311.
(photo credit: AP)
Turn on the TV or radio and chances are that you will hear a story about the
damage caused by the BP oil spill in the Gulf of Mexico. For savvy investors,
this type of a disaster and others like it may be an opportunity to profit.
While it may seem a bit crass to try and profit when birds and fish are dying –
and previously pristine, white beaches are now covered in oil – smart investors
lick their chops when such disasters strike.
Why? Because in the case of
BP, they focus not solely on the damage caused by BP, but rather on the damage
caused to BP’s stock and bond price. I want to make it clear that I am not
making any type of recommendation to run out and buy BP stocks or bonds, but
it’s a great example of what is termed “contrarian” investing.
who go against the general market trend are called “contrarians.”
contrarian is also defined as an individual who believes that certain
behavior among investors can lead to exploitable mispricings in the
markets. For example, widespread pessimism about a stock can drive its
low that it overstates the company’s risks and understates its prospects
returning to profitability.
A contrarian investor would make the case
that BP is the fourthmost profitable company in the world, and it has
lost more than half of its value. In addition, a contrarian would assess
even the worst-case scenario would mean that the company’s litigation
and clean-up costs would come to maybe two or three years of its
income. And no one expects the company to pay up immediately; much of
litigation exposure will get tied up in the courts for years.
It was 19
years after the Exxon Valdez oil spill until the Supreme Court made a
ruling regarding Exxon’s legal liabilities. I want to emphasize that
this is by
no means a recommendation to buy the stock – it’s just a good example to
Identifying and purchasing distressed stocks and selling
them after the company recovers can lead to above-average gains.
widespread optimism can result in unjustifiably high valuations that
eventually lead to drops, when those high expectations don’t pan
Unfortunately, some investors have an inverted
perception of risk.
They tend to buy stocks when they have already
appreciated significantly and sell them after they have already gotten
However, this is the opposite of the golden rule of investing: Buy low
Baron Rothschild, a member of the Rothschild banking family, is
credited with saying: “The time to buy is when there’s blood in the
even if the blood is your own.” This motto has served shrewd investors
decades. The most famous of all investors, Warren Buffet said: “You pay a
high price in the stock market for a cheery consensus.” In other words,
everyone is in agreement about a particular investment, it may not be a
one.It’s time in the market, not timing the market
For most investors,
contrarian investing may be helpful to help enhance returns, but it is
no substitute for a strategic asset allocation. Study after study has
investors do best if they are invested in the market and not sitting on
sidelines waiting to hit a home run. For example, if $10,000 were put in
investment that performed similarly to the S&P 500 Index from
to December 2005 and left untouched, this sum would have grown to
However, if the investor missed even the 10 best days of the stock
that 15- year period, his investment would have grown to only $31,994.
missing the stock market’s best 50 days during that time would have led
loss: the original $10,000 investment would have been worth only
While buying and selling constantly and trying to time the market
are not always advisable, it is worthwhile remembering that there are
opportunities in the market, especially after it has dropped. Analyze
investments objectively without getting caught up in the hysteria and
speculation that scares panicked investors, and you could potentially
when common sense email@example.com Aaron Katsman, a
licensed financial adviser in Israel and the United States, helps people
open investment accounts in the US.