The Joys of Crisis Investing – Real or Imagined

We have a special guest article today, written by a Blue Harbinger friend, Brian Coker, CFA. We agree completely with the sentiment of Brian’s article, and we hope you enjoy it as much as we do. It's really good!


Crisis is generally defined as: a time of intense difficulty, trouble, or danger. For purposes of this short piece, I am redefining as: a time of real or perceived intense difficulty, trouble or danger.

As an investor, generally crisis creates opportunity. When it occurs, my immediate reaction is to look for the opportunity created. It feels odd to invest when others are selling furiously – I will have to admit.  It is sort of like – oh my neighbor passed away this morning – I wonder if I can get a good deal on his vintage motorcycle? Crisis investing just feels a bit twisted at times.

Collaborating with my friend Mark Hines at Blue Harbinger, he and I agree stocks trading at depressed or crisis levels with strong dividends can create great long-term opportunities. Even if the stock price stays low for a bit, the investor enjoys a good dividend higher than high quality bond yields. However occasionally the siren call of the crisis mermaid pulls me out to sea without the safety of dividends. Below is a recent stock call I could not ignore.

In February 2016, Linkedin delivered a disappointing earnings report and projections. The stock fell over 35% in a 24-hour period. Fortunately, I did not own Linkedin and bought the stock after much of the decline at 114 per share and before the acquisition by Microsoft for $26.2B. Currently it is trading at 190. Why did I buy the stock? Frankly a quick 35% decline felt punitive for the announcements and Linkedin has the world’s best Rolodex with over 433M registered users around the globe. I figured it was only a matter of time before Linkedin or an acquirer would further monetize this Rolodex. Many hard-core stock analysts like to look for the answer in a company’s financials. I went to a liberal arts college before my MBA and CFA so lean toward a broad perspective. If your broad assumptions (the big picture) are correct, then the stock call has a good chance.

At this time, Linkedin is a good story.  Not every crisis investment turns out rosy. It is not enough to look at a crisis and the decline.  We have all bought cheap to only watch further declines.  Often you have to make a fairly quick assessment. Is this a real crisis? Or merely a flash over-reaction? What do you believe that the market does not believe? How long will this last?  Do you have the commitment to your big picture perspective to hold with further declines?

I love dividends as much as the next low interest rate environment prisoner, but on occasion – let your ears hear the sweet melody of the crisis mermaid without the safety of a high dividend. It can be a great add to the portfolio. Of course as always, don’t bet the farm!

The good news is there is always a crisis related opportunity around the corner. Sometimes they are broad like Brexit and other times they are company or sector specific. My advice to investors – train yourself to think like a contrarian and implement in the opportunistic bucket of your portfolio. When you see a crisis, your first reaction will usually be “oh no”.  Let’s make your second be “where is the opportunity created?” 

Where are today’s crisis opportunities? Send us your ideas.   

Brian Coker, CFA

 

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Located in Naperville, Illinois, Blue Harbinger is an independent research company dedicated to helping you identify exceptional investment opportunities while avoiding the high costs and conflicts of interest that are prevalent throughout the industry.

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