8.09.2009   The Panalyst Perspective

Investing in a crisis

Please note the following represents the opinions of the author and should not be taken as an investment recommendation.

While uncertainty remains and several false dawns have been called, the economic outlook has genuinely improved. Does this mean all the good opportunities for taking advantage of the crisis have disappeared? Not at all, but the more important point is that while there are different opportunities during good times and bad times, the rules of good investing don’t change.

Lesson 1: Risk is not just a word. For some risk is a red flag to a bull and they associate it only with returns, for others it should be avoided at all costs. In investment neither is true and all investments carry different measures of risk and return whether an investment is touted as a ‘gamble’ or a ‘sure thing’. Firstly use available information (Books, websites, newspapers, analyst articles) to gauge the risk of any possible asset. The crisis proved yet again that unlikely events do occur. Secondly and for myself more importantly decide is that risk appropriate for you. I personally give more weight to risk than return, because I can accept an underperforming asset but I hate losing money.

Lesson 2: Cash is king. In a crisis if you have cash in your account and your bank is still solvent you’re doing better than a lot of investors whose assets are devaluing. With cash you have available investment funds to take advantage of some of the crisis opportunity assets I’ll mention later. Liquidity is a major issue during a crisis, many sellers and very few buyers. Cash is the most liquid asset while many illiquid ‘safer’ assets such as real estate lost value during this crisis and owners were unable to quickly sell them.

Lesson 3: Create and stick to your own investment rules. Most of the professional stock traders I have met have broken their own rule at least once and usually regretted it. What is your personal goal every time you invest. Double your money? 40% on your investment? 20% per year? Decide and ‘cash out’ when you achieve your goal. Over time you might end up with one or two regrets about that stock that tripled after you cashed out, but on balance you will have built your wealth steadily.

Lesson 4: Trust your own judgement: Those who blindly follow the crowd usually invest too late during the good times and exit too late when a crisis comes. At the same time don’t be deliberately ‘contrarian’. Analyse opportunities, situations and recommendations and make sure the investment logic makes sense to you.

Lesson 5: Invest in what you understand: Use all the available online information and understand each asset class you go for. What exactly are you investing in? What determines the vale of your investment? How will you get your money out? What are the risks?

Crisis Investments

Distressed assets: During a crisis people and companies need cash, as sales drop, stocks lose value and banks stop lending. As a result they may be willing to sell assets (Cars, real estate, shares etc) at knock down prices in a ‘fire sale’. These opportunities are rare and to find them you will need to watch the market (Local papers, agents, www.allegro.pl) for companies and individuals that are in trouble. Some may auction off assets publicly, while others may need to be approached privately.

Stocks: During this crisis panic selling occurred and at some stage when the whole stock market was down, perfectly good ‘blue chip’ stocks were available for a fraction of their fair value. Ask yourself, why should a company that has good sales, strong financials and a sound business model be worth substantially less when the only thing that has changed is the fickle mood of the market.

Real estate: This crisis, which was largely caused by bad lending in real estate, hit property values hard. However as with stocks, don’t ‘throw the baby out with the bathwater’. Property will always be a stable long-term investment. Cash starved property developers can often be pushed for a great deal during these times. The same developers sometimes sell off parcels of land in their portfolios.

Commodities: Gold is a classic ‘safe haven’ investment during hard times. It is characterised by stable value, reasonable liquidity and is easier to buy than you might think.

Foreign exchange: Investing in currencies can be an easy way for an individual investor to take advantage of global economic movements. During the crisis the zloty moved significantly against the euro, pound and dollar.

And finally …… Classic cars: My own personal windfall from the crisis was a 1968 Chevy Camaro from the US, purchased when the dollar was particularly weak. With low import taxes, reasonable long-term growth prospects and terrible mechanical reliability, it’s certainly the most enjoyable investment I’ve ever made.