“As a general rule, it is foolish to do just what other people are doing, because there are almost sure to be too many people doing the same thing.” -William Stanley Jevons
Well, we just witnessed 5 straight days of selling in the global markets as panicked investors sold their stocks in droves due to concerns over the debt problems in the Euro zone and as fears of a global double dip recessions continue to grow daily. I, for one, do not dispute nor am I in denial that the global economy is teetering on the proverbial cliff or atleast approaching it but as one can find all the reasons in the world while the world is going to collapse on any news-outlet, I’ve decided to focus on the potential opportunity that may be arising.
Buy low, sell high. Simple investing advice but not always easy. The primary reason is psychologically we’re not built that way. As humans, for a whole host of reasons, as it relates to investing, would prefer to buy high, and sell higher (a la greater fool theory-hello real estate bubble anyone?). To buy low, would mean to buy during times of crisis and uncertainty which can and does induce feelings of fear, worry and a sense of contrarianism. However, to wait it out, (as in buy later when things settle) as some have suggested would mean missing out at low prices as Warren Buffett has said “you pay a very high price for a cheery consensus.”
And right now we are definitely in the middle of uncertainty. No one really knows what’s going to happen to the global economy in the next few days, months or year. There’s so many variables that people are simply focusing on the big two I listed earlier.
What I do know is if you have investment funds in cash and don’t need it for the next several years, placing an asymmetrical investment might be the best thing to do right now.
Look, I have no idea if we’re going to go into another recession or if the stock market is going to reach 2009 levels or worse, but what I do know is, if we take a step back and rationally think long-term we can find opportunity in US financials.
Specifically, without getting into too much detail, one should consider looking at Citigroup and Bank of America as both of their stock prices reflect a future in which they either go bankrupt (if it does, the world will never ever be the same, and you should stock up on guns, gold and food) or will never make a healthy profit again.
Take for example, Bank of America, due to mortgage losses, lawsuits (relating to mortgages), and fears of a double dip recession the stock is selling below $7 when any analysis would show you in normalized times, the bank could earn anywhere from $2-3 per share which would warrant a price around $30 per share. Now, I’m definitely not saying its worth $30 today, but it has the potential to be worth that much in 3-5 years. ( for more analysis, just google it, there’s tons of research out there, both positive and negative). So let’s play out the scenarios.
First we know that 1) we have money if we lost it all it would not cripple us financially 2) we are going to place a large enough bet to financially gain from an asymmetrical bet (loss vs potential gain is not symmetrical) 3) because we don’t foresee the need to liquidate the position within any short span we can think and invest long term.
Scenario 1: Goes to zero (or anything close to zero). This happens see above about guns, gold and food.
Scenario 2: Global recession, prolonged, stock trades from $1-$7.
Scenario 3: After a few years, business resumes to “new” normal reflecting new government regulations (basel III, etc etc). Stock will trade atleast at $12-$16.
Scenario 4: Same as #3 but economy fully recovers and BAC is able to return to somewhat “business as usual”. Stock will trade between $30-$40.
Basically, if scenario 1 happens, we’re all screwed so let’s not worry about that one. #2 is likely, so you lose anywhere from 1-90% of your investment. BUT if scenario 3 or 4 or anything in between happens (3.1,3.2, 4.1, 5!, etc) then you are looking at 100%, 200%, 400% returns on your investment.
And face it, you’re not exactly investing in a company that sells obscure medical products in the jungles of Congo, its Bank of America, the largest financial institution in AMERICA so make a bet on capitalism, you might just like the end result.