When I was 20 years old, I worked at a bank as a teller. I made $9 a hour, which was a pretty big deal for me since all of my jobs up to that point paid the minimum wage($5.25) Aside from the massive pay bump one of the other things that stood out to about that job was my relationship with the bank president. We became friendly and would talk about the stock market. This was the late 90’s and everyone was investing in dot com stocks and making a fortune. The president was telling me about some of his investments, I told him I was interested in getting into the game and he recommended a few stocks to me.
One of them was EDIG, they were involved in MP3 music players, what we now call Ipods. I bought thats stock at $2 1/4 (stocks used to trade in fractions) and sold it five months later for $20.00. I turned my $1700 into $17,000! This is the greatest things in the world I thought. Looking back, I realized that it was actually a curse. That easy win tricked me into thinking that I was smart. That all I had to do was pick a stock and watch it take off. It’s so simple.
Well, shortly after that the dot com bubble burst and I wasted a lot of time and money trying to recapture that success. I was always chasing what I call my three home run strategy. If I can turn $5,000 into $1,00,000 and then turn that into $2,000,000 I have won. While I will still concede that such a thing might be possible, I think its about as likely as getting hit by lightning three times. Trying to find three companies that go from unknown to stock market darlings is a frustrating, money losing, waste of time.
Over the years I have observed the market, paying extra attention to what seem to work and one of the best strategies in my experience is to find companies that have a long healthy track record, but for some reason or other they are experiencing some type of crisis. Not a decline mind you, I am not taking about buying Kodak stock when everyone is the world owns a digital camera. I mean a sudden shock to a company. Here are a few examples. I will mention the company, the crisis, and what you would have today if you invested $10,000 in that stock back then.
- BP (ADR) – After BP’s well exploded killing people and creating the largest oil spill in US history the stock tanked. Some people though they would go out of business, but if life has taught us anything its that oil companies can do pretty much whatever they want. BP paid some fines and went right on drilling. I’m not happy about it and every time I see one of their corny “were bring back the gulf” commercials I get mad, but facts are facts. At the peak of the crisis BP fell from about 60 dollars a share to $27. Let’s say you got in at $30 a share and bought 333 shares. This stock pays a dividend, if you reinvested that money you would have roughly 400 shares at $42.80 is just over $17,000. You would earn a 70% return in just three years.
- McDonald’s (MCD) – Back in late 2003 McDonalds was getting killed, their profits were down, several news stories were touting its decline, things looked bad for Ronald and company. I can still remember my coworker staying “They’ll be fine, it’s still the biggest fast food company in the world.” Boy was he right, not only did the stock go from $16 to over $100, but with dividends rolled in you are looking at some serious cash. I did a quick napkin drawing and ,all in, an investment of $10,000 back in 2004 would be worth over $80,000 right now.
In both cases these are household name companies those stocks suddenly got beaten down by a shocking event. When this type of thing happens I always look around and say, “Will they recover from this? What does the future look like for this company?” If they will recover and can continue to grow then you have to potential for a great investment.
I have two other examples and a company that I think is poised to follow this pattern in the near future that I will share with you in the second half of this article. Stay tuned.