Keep your wallet loose during crisis
During economic turmoil there will always be companies that will hatch golden eggs for you. Now seeking that company at right time is a sign of prudent investor.
Let us say you run a company that is in the business of buying oranges from farmers and selling it in retail. You have been buying a dozen oranges for Rs. 30 and selling them for Rs. 60. Suddenly, because of pests destroying most of orange crops, farmers are selling oranges for Rs. 60. So now you are buying oranges for Rs. 60.
The government in power feels oranges are very important for the nation, and a large part of the population will vote for them if orange prices are kept in control. Because of this the government has made it a law that no retailer can sell oranges for more than Rs. 60. You as a business can�t sell them at more than Rs. 60 even though that is your cost.
What if more pests attack the orange crop and the farmers sell oranges for Rs. 70 to you, but you are still forced to sell at Rs. 60?
What do you think would happen to your �orange company�s stock price� in such a case? Almost for certain the stock price would fall dramatically � especially if the government has such restrictions in place.
But what very few people will forget is that � are the pest attacks permanent? Will the government always have such restrictions? In the long run it will be difficult to be in the orange business if the government has such restrictions.
Almost every investment or business will sometime or the other face pests. And almost always these pests will affect the profitability of the company, but we need to ask ourselves as value investors � are these pests of a permanent nature? Or are these pests simply helping us discover value and invest in companies that will reward us with fruits for the long term? That is what every smart investor needs to study and decide.
Recently one such pest has helped a company become even more attractive for investment.
Over the recent years, many of my investments have been at the times of crisis, problems and challenges. My last successful investments were mainly made during the global economic crash of 2008/2009.
Now once again the world � particularly the Middle East and parts of north Africa are going through major political problems, with riots and political turmoil. Times are very challenging for people there and I hope there is peace soon. While most people are looking at the problems, I am someone who likes to look at things from all aspects, and in the midst of all this there are investment opportunities. I do understand that at such times it is hard to think about investing, to some it might seem heartless � but then that is how things work. Mittal picked up steel plants, when they were sick units making heavy losses and not at the peak of the boom.
People who are not from the world of investing and finance, fail to realize how everything in the modern day world is inter-linked. A riot in distant Libya can create opportunities for investors in India. Wealth created by these investors can lead to rise in asset prices back home in Bangalore, Mumbai or Delhi 3-4 years down the line.
The company I have been investing in has become even cheaper because of problems in Libya and pressure on Gaddafi. But this pest � Gaddafi, can be used to get more value for your investment.
Post the global recession and some incredible investing opportunities, we once again have something that will create immense wealth in the coming few years and more importantly will be talked about in hindsight. But as value investors it is our duty to get in first!
Any guesses which company this is?
Yogesh Chabria is a successful investor, bestselling author and entrepreneur. He started investing at the age of 16 with only Rs. 750. Today as the founder of The