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Crisis investing: Specific news events

Part one of this series introduced crisis investing and looked at the opportunity to profit when vague fears affect the stock market.

But how should you react when a specific event makes headline news?

Some events can be very significant for both history and stock markets, such as the fall of the Berlin Wall or the two Gulf Wars. Yet their long-term consequences are hard to anticipate.

For instance, German reunification following the collapse of their Berlin Wall actually depressed the German economy for several years.

In contrast, Bush Sr. and Jr.’s two Gulf Wars saw stock markets decline until the onset of hostilities, and then rally hard when war broke out.

Specific significant events can provide opportunities

‘Buy on the sound of cannons, sell on the sound of trumpets’ is one of investing’s less palatable maximums, but one that makes sense in the context of the uncertainty discussed in part one.

While individual companies might well profit from war, I don’t believe buying on the cannons reflects a blood lust at the heart of capitalism.

Rather, the cannons mark an end to the uncertainty that will have depressed prices before the onset of war. Battle might not be welcome, but at least it moves towards resolving situations for economies, nations and companies.

As mentioned, this happened during both the Gulf Wars. In particular, the days before the second invasion of Iraq saw the bottom of the 2000-2003 bear market here in the U.K.

The subsequent market gains are of zero consolation to the hundreds of thousands who have needlessly lost their lives in the subsequent ill-advised conflict, but from an investing point of view the lesson is clear.

Less predictable events have also made fortunes for some nimble traders, such those who shorted airlines on the morning of September 11th 2001, or the trader of legend who bought small boat builders in the U.K. in the wake of the Great Storm of 1987.

What to do after a shocking event?

Specific events can certainly present opportunities to lucky or skillful traders, but there are several hurdles to making money, including:

  • Morals – Some argued it was wrong to profit from the terrorist atrocities of September 11th, 2001. Others said letting the markets fall was just what the terrorists wanted. You will have to make your own mind up when atrocity next strikes.
  • Speed of execution – By their very nature, everyone knows about newsworthy events. Are you really going to beat other investors to the obvious opportunities, or will the news be instantly reflected in lower or higher prices, exposing you to potential loss if the event proves less important or unfolds differently to how it first appeared?

You may be best off thinking laterally when an event makes headline news, to try to find a less obvious way of gaining exposure to the event’s consequences.

Also, look to smaller companies that have a relatively greater exposure to the crisis.

A supermarket giant might sell more tins of baked beans on the onset of conflict due to consumers’ fears, but the effect will be lost in its overall sales.

In contrast, a small, specialist supplier of anti-chemical suits or bespoke military vehicles could see its earnings soar.

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