Crisis Investing: Profiting as the World Goes Mad…
Investors in crisis mode have no patience. Fear rules as the blood turns cold. But that, my friends, is when you get greedy. Take the 1970s for example. Ever since the 1970’s, for example, oil shortages and bizarre price spikes have lead to political and economic instability. That’s a given. But such episodic responses have historically fit the same pattern -- prices return to precrisis mode. Months after the 1973 Arab Oil Embargo sent the Dow tumbling sub-600 for example, it recovered to about 900. Patience was required, though.
Bad memories of 1973’s Arab Oil embargo are still met with grimacing Wall Street veterans, and Americans who remembers waiting in hour-long gas station lines, snaked around corners, to fill cars at quadrupled prices of $1. Yep, it was a bad time to be one of the 85% of Americans who drove to work, as crude would jump from $2 to more than $13 a barrel over the next year and a half.
In what many economists still refer to as the “nightmare scenario,” OPEC crippled the U.S. with an oil embargo, and spiked the cost of oil to Europe by some 70% as retribution for U.S. support of Israel during the Yom Kippur War. Responsibility rightfully fell on the Arab boycott of Western countries for supporting Israel during that war.
While it was eventually the Saudis who brought an end to the Arab oil embargo on the realization of a probable global depression that would have crippled Western economies, and eventually their own, the damage was already done. By the time oil prices began to stabilize in 1975, average stock prices were halved as U.S. equities plunged 50%, or $600 billion. That was equal to about 40% of GDP.
But, you see, that’s when you buy. Plus, one of the common mistakes a crisis investor, or “blood in the streets” investor made was selling at or near a bottom of the downtrend. Those who sold stocks at or near the bottom during the 1973 Arab Oil embargo crisis, for example, missed the extraordinary appreciable long-term gains as the Dow recovered from 600 to about 900 months later.
You buy when the streets run red with blood. When crisis hits, be ready. While most people run for cover, fortunes await traders who have both the backbone and financial means to buy fear. Or, as Warren Buffett best said, “Be fearful when others are greedy. Be greedy when others are fearful.”