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Investing in International Crisis

Written By Brian Hicks

Posted August 19, 2008

Note: As part of our ongoing educational Wealth Daily series, including How to Invest in LEAPS, How to Invest in Options, and Lockup Expirations, I wanted to bring your attention to the topic of Crisis Investing. Enjoy.




After the December 2007 assassination of Prime Minister Benazir Bhutto, the Karachi Stock Exchange plummeted along with Pakistan stocks… with a delay caused by a government suspension of trading.

On the market’s reopen, Pakistan’s financial markets were plunged into economic and political uncertainty, as fears of waning foreign investor sentiment raged.

But where there’s crisis, there’s wealth.

It’s known as “blood in the streets investing” or “crisis investing.”

While the investing approach may seem like a cold, heartless, cheap way to make a buck, it works. As the masses are selling, those who can stomach the wreckage step in and buy quality companies at significant discounts.

Take the unfortunate Bhutto assassination, for example. Investors waited for the news to be fully disseminated, and for the news to begin tapering off, at which point, they bought the damaged stocks, and waited for a recovery.

You see, crisis breeds opportunity, and it’s been exemplified many times. Again, let’s look at Pakistan stocks following the Bhutto assassination:

· Had you bought MCB Bank (MCBBI) for example after a fall from $14 to $12, you stood to profit on the recovery from $12 to more than $15.

· NetSol (NTWK) fell from $2.75 to about $1.75, only to recover from $1.75 to $2.50.

· Pakistan Oil & Gas Development (ODVCI) fell from $21 to $18.50 only to recover to $22 shortly thereafter.

History of Crisis Investing Opportunities

In 2007, for example, the Bovespa sold off and later recovered based on the market’s absorption of U.S. rate hike fears. Those who sold at or near the bottom of the sell-off missed the opportunity to profit as the IGBC rose 402.03 points, or 6.5%, two days later, and to pre-fear levels a year later.

In 2001, for example, severe political and economic crises stripped 50% off the Turkish lira, as hundreds lost their jobs. But had you bought the “crisis investment” opportunity, buying shares of strong, but beaten-down companies, you’d have made a small fortune. Turkcell, for example, plunged from $24 to $1.50 only to recover to $16.52 following the crisis.

Even George Soros has used crisis investments to his advantage. He made a billion dollars in one day playing England’s Black Wednesday currency crisis.

Truth told… When crises, such as Bhutto’s assassination, occur, be prepared to buy. Crisis investing may sound cold, but it’s proven to be profitable.

How To Invest in Post- Musharraf Pakistan

Faced with growing threats of impeachment by the ruling coalition government, Musharraf gave in and announced he was stepping down. “After viewing the situation and consulting legal advisers and political allies, with their advice I have decided to resign,” Musharraf said. “Please accept this decision. I am not thinking on personal levels, but Pakistan first. Take care of Pakistan.”

And it was no surprise when Pakistani stocks flew on news that President Pervez Musharraf was stepping down. We had a crisis over Musharraf and political turmoil. We had our opportunity to buy on Musharraf’s announcement. Crisis bred an opportunity.

So it came as no surprise when the Karachi Stock Exchange jumped about 5% to 10,719 on the news. Investors were buying the opportunity on the expectation that the change would end political deadlock

While there’s still time to buy the post-turmoil stocks we mentioned above, the rally’s sustainability will depend on who replaces Musharraf and how the fiscal policies would be resolved.

Crisis investing – you can buy the whole seat, but you’ll only need the edge.

Good Investing,

Ian L. Cooper

P.S. Options Trading Pit Has Launched

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* Fremont General September 2007 12.50 puts – 291% in 16 days
* Lennar January 2008 25 puts – 279% in 40 days
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* Centex January 2008 25 puts – 207% in 40 days
* Countrywide January 2008 27.50 puts – 203% in 69 days
* Thornburg October 20 2007 puts – 188% in 6 days
* MGIC Investments December 35 puts – 175% in 80 days
* Capital One January 2008 65 puts – 160% in 59 days
* Accredited Home September 2007 7.50 puts – 141% in 4 days
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