Finding
Opportunity Within Companies in Crisis
By
Anthony Rhodes
One of
the last things an investor wants to hear about is negative news
regarding a company that he or she owns. Such information is usually
proceeded by a downturn in the company’s stock value, a loss in the
investor’s capital, and, depending on the of the brevity of the
information, a decision on whether to keep or remove the stock from
the investor’s portfolio. This form of creative destruction is part
and parcel to the investment process, and represents an omnipresent
risk which all investors must be willing to assume. But some
individuals (being consciously cognizant of the nature of human
beings) are able to distinguish bad news from terrible news,
and use these moments of distress to realize opportunities that
others remain simply unaware of.
Like the
condor circling the carcass of a dying zebra, these investing
scavengers patrol the market on constant alert for companies in
crisis. Their aptitude for recognizing whether an entity can
withstand the negative press, provides them with an insight with the
potential for hefty payouts, while fully taking advantage of the herd
mentality, which is such a predictive component of investors, in
general.
This
methodology will be our focus for this week, as I explain why such an
aggressive tactic should be considered as an additional strategy
within your investing toolbox. While often being the recipient of
negative news themselves, you’ll learn that scavengers play a far
more important role in the investment cycle than are commonly given
credit for. And after being made aware of the rewards inherent
within this role, you just might be willing to proudly proclaim
yourself a soon-to-be scavenger, as well.
The Propensity to Panic
Investors
tend to be a paranoid lot. Many view negative news about a stock that
he or she owns as a reason to part ways with the company, as they
generally have large sums of money invested, and would like to keep
their losses within such holdings to a bare minimum. This is why you
often see sharp selloffs whenever negative news is reported, and is
the primary reason why scavenger investors thrive within this
environment. These individuals convert this propensity to panic into
opportunities to bottom feed, and to purchase those distressed names
after their selloff, under the belief that they will quickly rebound
once cooler heads eventually prevail.
A Surface Wound, or A Killing Blow?
Without a
doubt, the nature of the news being reported plays a pivotal role in
determining whether you should scavenge or not. Professional
scavengers often have a thorough understanding of most companies’
financials, and are thus able to swiftly diagnose whether the news
will have either a short or long-term effect on its growth prospects.
For this reason, it pays to do your homework, and to initially
ascertain a complete understanding of a small group of companies. As
time progresses, more names should be added to your watch list, and
depending on the depth of your accrued knowledge (and after fine
tuning your strategy through back testing), you should be
well-equipped and prepared to scavenge like a vulture!
What goes
up must inevitably come down, though the opposite of this saying
doesn’t always ring true. Scavenge investing is by nature a risky
endeavor, which is why it is seldom employed by traditional money
managers, and is normally relegated to the very fringes of the
investing community. But despite their reckless reputation,
scavengers actually play an important role in facilitating the demand
for liquidity within the capital markets. Whether feast or famine,
this strategy has the potential to undoubtedly produce large payouts
in very short amounts of time, which always makes the search for
corporate carrion more than worth while.
(Anthony Rhodes is the President and owner of wealth management firm The Planning Perspective www.theplanningperspective.com )
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