Buy low, sell high. This is the truth of profitable trading. Peter Lynch, one of the most respected investors in history, said it another way: “Buy when there’s blood in the streets. Sell on euphoria.” Today, the gutters are running red with hapless investor’s blood, as the markets reel from the overnight disappearance of two of the most powerful financial services companies in America, Merrill Lynch and Lehman Brothers.
Lehman brothers, after surviving the Great Depression, the S&L Bailout, and the Tech Bubble, has succumbed to the present Credit Crisis, and filed for bankruptcy, listing more than $600 Billion in debt in it’s filing. Merrill Lynch has accepted a $50 Billion buyout offer from Bank of America, who also this year purchased deeply troubled Countrywide Mortgage, the first visible casualty of the Credit Crisis we now suffer. Additionally, Fannie Mae, and Freddy Mac have been taken into ‘conservatorship’ by the US Government, essentially doubling US Government debt overnight. US markets are plunging, suffering the worst decline since 9/11.
American International Group Inc., or AIG, part of legendary Berkshire Hathaway (NYSE: BRK.A and BRK.B), formerly the largest insurance company in the world, has narrowly held off bankruptcy itself by securing $85 Billion in bridge financing to carry it over a liquidity crisis caused by a flood of claims it couldn’t pay. While it isn’t over yet, AIG is on the ropes, and if it does collapse, it’s handling of pensions, life insurance, and interconnection in financial markets will cause a great deal of disruption – far more than Lehman Brothers has already.
That being said, it certainly looks like a good time to buy well managed companies that have been dragged down by markets full of panicking investors, and commodity producers whose prices have declined relative to the dollar. To profit from this crisis we can go long commodities, and the companies that sell them. Maintaining standards of excellent management, companies such as Vale (NYSE:RIO), in Brazil, and BHP Billiton (NYSE:BHP), in Australia, offer superlative prospects. Gold producers, such as Newmont (NYSE:NEM), Barrick (NYSE:ABX), and SPDR Gold Trust (NYSE:GLD), an Exchange Traded Fund, or ETF, can all be expected to rise as inflation and serial crises impact Wall St.
No matter how bloody the streets get, don’t lose discipline. Make sure you invest in well managed companies, whose business you understand, and spread the risk to avoid unforseeable catastrophes. Once you’ve done your due diligence, and bought some good companies poised to profit from market conditions, set trailing stops so that you lock in profits once the euphoria peaks.
Then, keep an eye on things to make sure your original assessments hold true. Doing so, you ensure that you are able to respond appropriately to any changes in the fundamentals that led you to invest in a company.
Finally, maintain sound diversification amongst your assets. Don’t bet the farm that the dollar is going to drop. Most of the research I have done actually indicates that the dollar is expected to continue to strengthen against other currencies, and commodities, as the Credit Crisis spreads globally, and there’s no use in pretending to certitude regarding future market moves. The smart investor positions their assets to take advantage of markets – no matter which way they go. So make sure you are going to profit should the dollar resume it’s slide, and make sure you are going to profit if it doesn’t.
It’s sure to do one or the other!