What would you buy and hold if every stock was -40% off?

[luutzu]

For those interested in the Bail Out:

The Big Bank Bailout
Most people think that the big bank bailout was the $700 billion that the treasury department used to save the banks during the financial crash in September of 2008. But this is a long way from the truth because the bailout is still ongoing. The Special Inspector General for TARP summary of the bailout says that the total commitment of government is $16.8 trillion dollars with the $4.6 trillion already paid out. Yes, it was trillions not billions and the banks are now larger and still too big to fail. But it isn’t just the government bailout money that tells the story of the bailout. This is a story about lies, cheating, and a multi-faceted corruption which was often criminal.
-----------

$200M would replace the lead and virus infested water system to Flint. Nope. Can't afford it so the people will have to learn to drink filtered water and bathed and cook in shiet.

$2 Trillion would create tens of millions of jobs rebuilding the US crumbling infrastructure - road, rail, bridges, water utilities... Nope! Can't afford it.

Affordable healthcare? Nope! Loan for higher education? Nope!

But the banksters crashing the economy... here's a few trillion dollars. Do whatever you want with it.

Then a few farkers turn around and sue the gov't for it too.

 

[Klogg]

That would be true if risk/reward equations are linear in all stocks. Often times though they are not. A simplest example would be a stock with a pretty solid base line (e.g. cash backing). You may not buy it today when it is trading at cash backing, but you might make a case for it when it's trading @ 60c in a dollar.

Having said all that.... if every stock is 40% cheaper tomorrow, the one share I'd definitely buy would be BKN. Unconditional takeover offer @ $3.25, bought for $1.95.

Good point - completely overlooked that.

 

[luutzu]

The question was - what would you buy if everything was 40% off.

Your answer was - Buy ones that will get bailed out.

Wind the clock back to 2006, you identified that AIG was too big to fail. AIG's share price was ~$1450.

The GFC unfolded, AIG's share price fell 40% to $870. You executed your strategy "If share price is 40% off, buy ones that will get bailed out".

Congratulations on your splendid return using your strategy on AIG (last price $63).

No one is saying you can't buy after the bailout... but THAT IS NOT WHAT YOU SAID!

From memory, the GFC kinda started in early 2007, didn't go full blown panic until about late 2008. So it's not 2006.

But let's play this game and get literal...

A DROP less than 40% followed by RISE soon after do not fit our literal definition of a 40% drop.

So the Dow drop by 40% starts in 1st Aug. 2008. @11,543.96.

A 40% drop would bring the Dow to about 6900 level.

So Feb1 2009 at 7062 is close enough an approximation as the Dow never went below 40% in a straight line [we're taking this -40% literally, right?]








What was AIG's share price from that 1st Aug. 2008 to the Dow dropping to its lowest [close to 40% drop] on Feb1 2009?

From $429 to $8.40 a share.

So if a system was devised as MrChow's query stated, and my "advise" to buy in knowing AIG will be bailed out... on the 1st Feb 2009, we buy AIG at $8.40 a share.

It's now $62 odd a share.

Stupid idea yea?

 

[InsvestoBoy]

During the GFC I was buying ASX listed gold miners with lots of cash and no debt, to some success, however I only caught the initial rebound and sold well before they topped out in 2011.

However, lesson learned for me personally, next time such an event occurs I would buy:

NOTHING!

What I noticed is that it would have paid to wait. You can tell that conditions have eased when stocks start to make new all time highs again, and those flyers are also good candidates to buy as the first to exhibit strength and demand for shares.

As a random easy example, which I don't feel is cherrypicked because you can see a lot of stocks had similar performance:

In Nov 2007 AAPL peaked on the NASDAQ at a bit under 27USD. By Feb 2009 it had suffered ~50% drawdown from the high. But it was one of the first large stocks to make a new all time high in Oct/Nov 2009, again around 27USD.

Current price: ~138USD.

 

[OmegaTrader]

For those interested in the Bail Out:

The Big Bank Bailout
Most people think that the big bank bailout was the $700 billion that the treasury department used to save the banks during the financial crash in September of 2008. But this is a long way from the truth because the bailout is still ongoing. The Special Inspector General for TARP summary of the bailout says that the total commitment of government is $16.8 trillion dollars with the $4.6 trillion already paid out. Yes, it was trillions not billions and the banks are now larger and still too big to fail. But it isn’t just the government bailout money that tells the story of the bailout. This is a story about lies, cheating, and a multi-faceted corruption which was often criminal.
-----------

$200M would replace the lead and virus infested water system to Flint. Nope. Can't afford it so the people will have to learn to drink filtered water and bathed and cook in shiet.

$2 Trillion would create tens of millions of jobs rebuilding the US crumbling infrastructure - road, rail, bridges, water utilities... Nope! Can't afford it.

Affordable healthcare? Nope! Loan for higher education? Nope!

But the banksters crashing the economy... here's a few trillion dollars. Do whatever you want with it.

Then a few farkers turn around and sue the gov't for it too.

View attachment 70337

View attachment 70338

1) people taking loans on non recourse they can't afford to repay is corrupt
2) borrowing 120% of GDP to spend on waste and bureaucracy is corrupt
3)Bailing out private capitalist institutions is corrupt
4) Ceo's pay levels is/are corrupt
5) Multinationals playing tax silly buggers is corrupt
6) politicians accepting donations from self interest groups is corrupt
7) Lawyers and medical professions cartel monolopy is corrupt
8) Opec is corrupt
9) energy and water companies are corrupt creating false scarcity
10) people are corrupt

The man gets in the way of the game.

But we still have hot water and food don't we. Plus reasonable wages to waste disposable income on consumer knick nacks. I can also walk down the street safely.


gg

 

[luutzu]

1) people taking loans on non recourse they can't afford to repay is corrupt
2) borrowing 120% of GDP to spend on waste and bureaucracy is corrupt
3)Bailing out private capitalist institutions is corrupt
4) Ceo's pay levels is/are corrupt
5) Multinationals playing tax silly buggers is corrupt
6) politicians accepting donations from self interest groups is corrupt
7) Lawyers and medical professions cartel monolopy is corrupt
8) Opec is corrupt
9) energy and water companies are corrupt creating false scarcity
10) people are corrupt

The man gets in the way of the game.

But we still have hot water and food don't we. Plus reasonable wages to waste disposable income on consumer knick nacks. I can also walk down the street safely.


gg

Would it last?

We in the West are the very privileged few. To have enough savings/capital to invest in the stock market put us at a higher end of that already privileged few.

I'd count on it lasting forever the way I'd count on all previous imperial power lasting forever when they went down the same corrupt path.

So while it still last, of course the corrupt, polluted, unequal, increasingly violent world is all sweet for those with money. Money tend to do that - putting a bubble around our living space; pushing away all the shiets of the world to where they belong - somewhere else far far away.

 

[OmegaTrader]

Wars have decreased
equality has increased
corruption has decreased.

the tide raises all boats.

I think this is off topic enough from me

cheers

 

[OmegaTrader]

Would it last?

We in the West are the very privileged few. To have enough savings/capital to invest in the stock market put us at a higher end of that already privileged few.

I'd count on it lasting forever the way I'd count on all previous imperial power lasting forever when they went down the same corrupt path.

So while it still last, of course the corrupt, polluted, unequal, increasingly violent world is all sweet for those with money. Money tend to do that - putting a bubble around our living space; pushing away all the shiets of the world to where they belong - somewhere else far far away.

It is hard to reconcile the morality of a bailout, printing money and government overspending to support reckless risk taking and poor regulation, nevertheless it is part of the landscape and if one is investing an entity that is bailed out has a much better chance than an entity that is left for dead.

Even if it is hard to accept it still needs to be considered but as with AIG timing is still supremely important.

After the smoke has cleared and if business continues as usual people seem to kick themselves for not buying a bargain. Especially if the government has stepped in to stop collapse.

I have said enough I think

 

[MrChow]

When I was looking into this as a topic I found some non-cyclicals that fell over 30% during the 2008 period but still had consecutive EPS growth from 2007-2008-2009-2010 each year, so every part of the price drop was just a valuation discount.

Staples - WOW, TRS, BKL
Healthcare - RHC, CSL
Telecom - TLS
Utilities - ORG

 

[DeepState]

I'm curious to know how someone can tell whether a critical piece of the financial infrastructure would be nationalised (Northern Rock, predecessors to Nordea), allowed to collapse (Lehman), recapitalised as a stand alone entity which recovers (AIG), recapitalised as a stand-alone entity which gets merged with another organisation at punitive levels or nationalised because it's not working out and political will or the federal balance sheet has been exhausted, recapitalised via preferred stock which is then used to completely dilute base equity if things don't work out, or forced to merge with another organisation at punitive rates (Bear Sterns, Merrill Lynch).

Isn't it amazing how much money you can make in special situations with perfect foresight and no emotions.

 

[luutzu]

I'm curious to know how someone can tell whether a critical piece of the financial infrastructure would be nationalised (Northern Rock, predecessors to Nordea), allowed to collapse (Lehman), recapitalised as a stand alone entity which recovers (AIG), recapitalised as a stand-alone entity which gets merged with another organisation at punitive levels or nationalised because it's not working out and political will or the federal balance sheet has been exhausted, recapitalised via preferred stock which is then used to completely dilute base equity if things don't work out, or forced to merge with another organisation at punitive rates (Bear Sterns, Merrill Lynch).

Isn't it amazing how much money you can make in special situations with perfect foresight and no emotions.

Nice piece of sarcasm there Youngie. I didn't know you had it in you.

But while no one can perfectly predict the timing of a turnaround or pick the bottom of any stock, the recent past does present a few opportunities to test whether or not those with limited understanding of the company, such as myself, can take advantage of some great market over-reaction.

There's oil, commodities, industrial/engineering services. Any idiot could see that some fire sales were a bit overdone.

 

[luutzu]

Wars have decreased
equality has increased
corruption has decreased.

the tide raises all boats.

I think this is off topic enough from me

cheers

I don't think it's off-topic at all.

While history suggests that the gov't will step in and correct whatever shiet storm the masters of the universe brought down on the world next time... there is no guarantee of it; there is no certainty that the gov't can do what they've done - bail out - and still keep the masses in check as they have.

So while a strong and established business will, in time, recover its business performance and share price... to jump on companies we know are now weak but are so connected that a bail out is but a formality. Such things might not be possible in the future.

But yes, it is off topic in that we're interested in stock recommendation more than the armchair geopolitical/macro bs we think we know.

 

[OmegaTrader]

I'm curious to know how someone can tell whether a critical piece of the financial infrastructure would be nationalised (Northern Rock, predecessors to Nordea), allowed to collapse (Lehman), recapitalised as a stand alone entity which recovers (AIG), recapitalised as a stand-alone entity which gets merged with another organisation at punitive levels or nationalised because it's not working out and political will or the federal balance sheet has been exhausted, recapitalised via preferred stock which is then used to completely dilute base equity if things don't work out, or forced to merge with another organisation at punitive rates (Bear Sterns, Merrill Lynch).

Isn't it amazing how much money you can make in special situations with perfect foresight and no emotions.

Almost any investment/trade things can go wrong. I think that is a general problem, not specific to strategies taking advantage of market crashes/extremes. That is no different to when conditions are extreme except that maybe there would be more volatility and uncertainty etc

How would a government justify not acting in a crises by throwing the kitchen sink, printing money, borrowing/eating surpluses to spend and helping financial institutions and transactions continue in the economy. Even taxing to raise the revenue or a bail in.

Sure they could be overwhelmed or the help could be partially ineffective and or inequitable. But even Obama and the fed eventually back flipped to support the banks.

I doubt many governments would not act.As mentioned recent and past history has not shown that around the world.

I don't think it's off-topic at all.

While history suggests that the gov't will step in and correct whatever shiet storm the masters of the universe brought down on the world next time... there is no guarantee of it; there is no certainty that the gov't can do what they've done - bail out - and still keep the masses in check as they have.

So while a strong and established business will, in time, recover its business performance and share price... to jump on companies we know are now weak but are so connected that a bail out is but a formality. Such things might not be possible in the future.

But yes, it is off topic in that we're interested in stock recommendation more than the armchair geopolitical/macro bs we think we know.

I think part of it is that it is for some people it is more interesting to talk about macro although they want a tip. Rather than just saying for example I would invest in BHP or ANZ etc etc .

Also I think the reasoning is implicit in decision making and analysis anyway, or should be to some extent. Every-time you put money in the bank you hope the bank will be solvent, Aus gov bonds, the gov will be solvent, buy a derivative hope that the counterparty will not fail or exchange traded assets as well for that matter. Buy an asset, hope private property rights will be respected, hold cash, hope that the government will not inflate it's value too much or tax too much of the profits

Every interaction is in the macro system, that is why it should always be in the back of the mind. Alot of people make assumptions but the GFC showed that those assumptions fall apart in extreme events. Even the poster assumed that the market would bounce back.

 

[DeepState]

I doubt many governments would not act.As mentioned recent and past history has not shown that around the world.

The issue to hand wasn't so much about whether governments would act or not (since there were banks, there were property bubbles, busts and rescues) but the form and extent of their actions. How they choose to intervene matters a lot to what happens at different levels of the capital stack. Is is outright nationalisation? Pari-passu equity? Preferred stock? Guarantee of senior debt? Corporate restructure? Each of these is an intervention. Each has very different implications for someone holding base equity in the hope of upcoming intervention.

If a government published its policies up front and named which banks are systemically important and would be bailed out through the exclusive use of equity only, it would create a new wave of moral hazard. So a degree of opacity is important to maintain financial stability.

Which entities they choose to rescue or, even, throw a lifeboat to even if a rescue is not required (eg. Goldman, JP Morgan to reduce stigma associated with drawing on certain special facilities) or leave to die (Lehman, LTCM, Laiki) changes outcomes substantively. This makes an investment process of buying equity in companies which are sure to be bailed out rather dubious.

AIG wasn't even thought to be systemically important a week before it had to be rescued. The issue of the size of CDS liabilities was not a feature on Geithner's agenda until quite late. It was highly uncertain as to how this would take place. In future, the more likely course of action would be for Treasury to guarantee the derivatives liabilities but let the company die.

In the event that the markets fall 40%, my advice would be the same as if the markets fell by 20% or rose 10%. Buy/hold the cheap ones. Like magic.

 

[InsvestoBoy]

AIG wasn't even thought to be systemically important a week before it had to be rescued. The issue of the size of CDS liabilities was not a feature on Geithner's agenda until quite late.

What are you basing this statement on?

The book "Too Big to Fail" which has unprecedented insight into the timeline of events portrays a pretty different story, that Geithner was clearly made aware of AIG CDS exposure when Lehman was still trading (as you'll see below at $8.50 a share).

snippet from the book:

As Dimon and Zubrow entered the Federal Reserve’s Eccles Building on Constitution Av-
enue, Zubrow sneaked a quick look at his BlackBerry before passing through the security X-
ray machine. He was alarmed at what he saw: Lehman’s stock had plunged 38 percent, dip-
ping to about $8.50 a share.
In Lower Manhattan’s financial district, Robert Willumstad, AIG’s CEO, sat on the thir-
teenth floor of the Federal Reserve Bank of New York waiting to meeting with Tim Geithner.
With the markets in turmoil, he had returned to see Geithner to press him again to consider
making the discount window available to his company. While Geithner may have spurned his
abstract request last month, this time Willumstad had come with a more detailed proposal to
turn AIG into the equivalent of a primary dealer like Goldman Sachs or Morgan Stanley—or
Lehman Brothers. “It’s going to be a few minutes. He’s on the phone,” Geithner’s assistant
told him.
“No problem, I have time,” Willumstad replied.
Five minutes passed, then ten. Willumstad looked at his watch, trying to keep from getting
annoyed. The meeting had been scheduled to start at 11:15.
After about fifteen minutes, one of Geithner’s staffers, clearly embarrassed, came to
speak with him. “I don’t want to hide the ball on you,” he said. “He’s on the phone with Mr.
Fuld,” he revealed with a knowing smile, as if to indicate that Willumstad might be waiting a
while longer. “He’s up to his eyeballs in Lehman.”
Finally, a half hour later, Geithner appeared and greeted Willumstad. Geithner was clearly
overwhelmed, his eyes darting around his office as he nervously twisted a pen between his
fingers. He had also just flown back from an international banking conference in Basel,
Switzerland.
After some pleasantries, Willumstad explained the purpose of his request for this meeting:
He wanted to change—no, very much needed to have—AIG’s role in the finance sector codi-
fied. He said that he wanted AIG to be anointed a primary dealer, which would give it access
to the emergency provision enacted after Bear Stearns’ sale, and thus enable it to tap the
same extremely low rates for loans available only to the government and other primary deal-
ers.
Geithner stared poker-faced at Willumstad and asked why AIG FP deserved access to the
Fed window, which, as Willumstad was well aware, was reserved for only the neediest of fin-
ancial institutions, of which there were now far more than usual.
Willumstad made his case again, this time with a litany of figures to back up his argument:
AIG was as important to the financial system as any other primary dealer—with $89 billion in
assets, it was actually larger than some of those dealers—and should therefore be granted
the same kind of license. And he mentioned that AIG FP owned $188 billion worth of govern-ment bonds. But most of all, he told Geithner, AIG had sold what was known as CDS protec-
tion—essentially unregulated insurance for investors—to all of the major Wall Street firms.
“Since I’ve been here, we’ve never issued any new primary dealer licenses, and I’m not
even sure what the process is,” Geithner said. “Let me talk to my guys and find out.” Before
Willumstad turned to leave, however, Geithner posed the question that really concerned him,
the one that had been occupying his thoughts all morning: “Is this a critical or emergency situ-
ation?”
Willumstad, fortunately, had been prepared to address this very topic. In meetings with
AIG’s lawyers and advisers, including Rodgin Cohen at Sullivan & Cromwell and Anthony M.
Santomero, the former president of the Federal Reserve Bank of Philadelphia, he had been
guided on how to fie ld the question with the advice, “Tread carefully.” If he acknowledged
that AIG had a true liquidity crisis, Geithner would almost certainly reject its petition to be-
come a primary dealer, denying the company access to the low-priced funds it so badly
needed.
“Well, you know, let me just say that it would be very benefic ial to AIG,” Willumstad care-
fully replied.
He left Geithner with two documents. One was a fact sheet that listed all the attributes of
AIG FP and argued why it should be given the status of a primary dealer. The other—a bomb-
shell that Willumstad was confident would draw Geithner’s attention—was a report on AIG’s
counterparty exposure around the world, which included “$2.7 trillion of notional derivative ex-
posures, with 12,000 individual contracts.” About halfway down the page, in bold, was the de-
tail that Willumstad hoped would strike Geithner as startling: “$1 trillion of exposures concen-
trated with 12 major financial institutions.” You didn’t have to be a Harvard MBA to instantly
comprehend the significance of that figure: If AIG went under, it could take the entire financial
system along with it.
Geithner, his mind still consumed with Lehman, glanced at the document cursorily and
then put it away.

 

[DeepState]

What are you basing this statement on?

My recollection of what happened....which could be faulty, but is not on this occasion.

The book "Too Big to Fail" which has unprecedented insight into the timeline of events portrays a pretty different story, that Geithner was clearly made aware of AIG CDS exposure when Lehman was still trading (as you'll see below at $8.50 a share).

snippet from the book:

Lehman went over on 15 Sept 2008. The share price for Lehman closed below $8.50 on 9 Sept 2008. The AIG bailout occured on 16 Sept 2008. 16 - 9 = 7 days. That would be a week.

Furthermore, the last sentence in your extract highlights that Geithner did not have it in his sights at that time. It was all about Lehman.

To expand further, given the length of the extract provided...

One of the biggest errors of the time was letting Lehman go. When it died, they knew they screwed up and stepped in hurriedly to bolster AIG.

The AIG issue was less about the magnitude of losses that might be spread to the rest of the system than it was about the complexity of unwinding a tangle of cross claims that would inevitably arise. This creates a serious, system-wide, liquidity issue that would cause mayhem.

Their bailout figure, designed to safely cover the contingencies on the CDS liabilities (if you are going to bail-out, push it beyond doubt or there is no point), was USD $184bn. That is not a particularly large figure when scattered around a lot of banks in terms of losses. The issue was liquidity and uncertainty.

The Gross Notional of a couple of trillion isn't really a scary figure. In Australia, our gross notional in the banking system was around USD 7tr at the time. We're tiny. It's like one of our banks going down, but as part of the US system. You'd notice it but it would not kill if isolated.

 

[Iggy_Pop]

One share I looked at during the 2008 downturn was GMG, They were at $32 prior to the crash and fell to below $1. I did research and read many forums, and there were a few who kept buying on the way down, ultimately to lose a lot, and then sell at a significant loss. These stories got me thinking and I felt to buy GMG was a bit like gambling at the bottom, it was the banks who were deciding to keep them afloat or not. They survived and now are around $7.
I did buy CBA and ANZ at low levels, missed out on NAB.
Got burnt with BBI
These days with a bit more wisdom, would wait and follow the coppock indicator as the signal to buy and would go for anything I was comfortable with in the top 50 on the ASX.
Not sure I would sell all on the way down. In 2008 I did buy and sell a bit and had mixed results.

Iggy

 

[sptrawler]

Iuutzu all the charts you showed were banks, is that a hint or just random choice?
After the GFC WES did a capital raising at $12, I jumped in, sold out at $20, back in at $40.
Nab went down to around $15, jumped in, jumped out at $20, thinking second wave is coming, back in at $32.
It really is hard to jump in and jump out, you miss the dividends, then if it is a good company you buy in at a higher price.
To me that is the difference between charters and fundamental investors, one looks for the get in and get out price relative to historical trends, the other looks for underlying value and dividends.
Both have their merits, it really depends on the personality of the investor, as to which path suits them.

 

[luutzu]

Iuutzu all the charts you showed were banks, is that a hint or just random choice?
After the GFC WES did a capital raising at $12, I jumped in, sold out at $20, back in at $40.
Nab went down to around $15, jumped in, jumped out at $20, thinking second wave is coming, back in at $32.
It really is hard to jump in and jump out, you miss the dividends, then if it is a good company you buy in at a higher price.
To me that is the difference between charters and fundamental investors, one looks for the get in and get out price relative to historical trends, the other looks for underlying value and dividends.
Both have their merits, it really depends on the personality of the investor, as to which path suits them.

Just went down the list of companies that got bailed out the most in that first $700B wave. GM was there but couldn't get its chart back to the GFC.

In a financial market crash, the banks are often the ones that will get hit the worst. But as with all credit crunch, I guess any empire builder with heavy debt burden will go too.

So the likes of APA, property trusts... if they don't go under, investors will either have to bail them out in a massively dilutive cap raising; or if they're big and important enough, the taxpayers will have to step in.

BUt yea, I was being smart about picking those you know to be bailed out. It's not easy to know which... though in Australia, the big four banks looks a good bet.

Even I knew that way back then... but as with the recent oil crash, jump in too early and be out of ammo long before the bottom is hit.

Though with Santos, I did managed to buy some $5K's worth at $2.50s... but let's ignore the average price I jumped in when I see it was a bargain. Still think it's a bargain though, just hindsight show it could have been better.

 

[sptrawler]

Even I knew that way back then... but as with the recent oil crash, jump in too early and be out of ammo long before the bottom is hit.

Though with Santos, I did managed to buy some $5K's worth at $2.50s... but let's ignore the average price I jumped in when I see it was a bargain. Still think it's a bargain though, just hindsight show it could have been better.

With Santos I lost a lot, didn't expect the the management to turn down a good buy out offer, at the expense of the shareholder.
Just shows how little regard the management has for the shareholders, when their salaries are at stake, a really shitty company IMO
How many capital raising's have they done, since the what was it $7.80 or something like that offer?
Absolute bunch of idiots, that shouldn't be running a company .IMO
Absolutely appalling, the management is meant to take an objective view, has Wesfarmers ever knocked back an unbelievable offer for their companies?
IMO Santos management, were more interested in their own skins, than their shareholder interests, and I think through the share dilutions everyone is aware of it.
Anyway only slightly on topic.
Thankfully the Banks are always in the spotlight, and would struggle to get away with completely outrageous behaviour, one would hope.