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Current Events--Potentially an Investor's Best Friend

By Edited Nov 13, 2013 0 0

CURRENT EVENTS CAN BE AN INVESTOR'S BEST FRIEND

With the large number of books, seminars, investment gurus, audio, and TV networks that exist for the sole purpose of teaching people how to invest, it's understandable that most Americans simply give their money to someone else to invest--if they even invest at all.  However, there is one highly profitable investment strategy that does not need a MBA from Harvard.  Understanding current events and their effect on the marketplace can yield high rewards for attentive investors.  In this article, I will give examples of current events that resulted in "no-brainer" investment opportunities and I will also give a thought on one particular current event that will unfold soon and give investors a great opportunity.

 

BP Oil Spill of 2011

We all remember on April 20, 2010 when the infamous BP oil spill occurred off the Gulf Coast.  Not only was this the worst PR crisis in the company's history, but was also the worst oil spill in US history.  As a result, their stock price started to plummet immediately on the day of the oil spill.  Please take a moment to look at BP's stock price around the time of the oil spill (April 2010).

BP stock chart
Credit: CNBC

As you can see, BP's stock price started to drop in April and the fall did not stop until June.  There were three reasons indicating that while many people were frantically selling their stock, sound investors could buy BP stock at a bargain price.  The first reason was that BP was and still is one of the most profitable companies on the planet.  As bad as the situation was, the fact remained that BP was one of a few companies that controlled an asset that billions of people needed. The second reason was that there was a liability cap in place that would have made BP liable for only $75 million in cleanup costs, even though the oil spill actually caused billions in damage.  The third reason was a piggyback off of the second--even with the cap of $75 million in place, BP restored some of its public image by agreeing to cover the full cost of the oil spill and make payments to any businesses and people affected by the disaster.   Once all the frantic overselling of BP stock stopped, the stock price took a turn for the better and continued to climb during the rest of the year.  Anyone who invested in May of 2010 and cashed out in May 2011 would have made a sizeable profit around 50%.  I know many people who bought BP at $30/share and cashed out at $45/share--you won't find a 1-year CD with these kind of returns! The stock continued to climb until mid-summer of 2011, when it and most other stocks started to take a beating because of the next topic I will discuss--the US debt crisis. 

 

 

US Government Debt Crisis of 2011

Around  July  2011, Congress still had not signed a law that would allow the government to have enough money to pay its debt.  Many noted that by August 2, the government would be out of cash to pay its bills--a major bill being Social Security checks to those who depended on them.  TV and newspapers flooded with "doom and gloom" articles about how the country would suffer if Congress didn't reach a deal.  Take a moment to look at how the overall stock market reacted to this crisis (July-October 2011).

Stock Market Performance during Summer 2011

Notice that between mid July 2011 and August 2011, the stock market as a whole dropped about 10 percent in value.  A wise investor would have realized that even though Congress cannot seem to agree on anything these days, they would certainly reach a deal that would allow the US to pay its debt.  If it didn't the entire economy would probably collapse.  So, eventually, around the time of the August 2 deadline, Congress made a deal and the country was able to continue paying its bills.  However, the stock market still dragged at this low level for a few months, so investors had plenty of time to buy many stocks at bargain prices.  The graph clearly shows how the market has climbed about 10-15 percent since the summer/fall of 2011.

THE NEXT BIG PIECE OF NEGATIVE NEWS MAY BE YOUR OPPORTUNITY TO INVEST

  I know many investors who saw both the BP oil spill and the US debt crisis as signals to invest in the market, and they made a nice profit in the process.  Unwise investors see or read negative, short-term national headlines and overreact to them by pulling out of the stock market even though they shouldn't.  YOU, however, now know that this is the exact time when you should come in and buy stocks at a bargain.  Don't feel too bad if you didn't realize the BP or US debt situation as a good time to invest because opportunities like these pop up at least a few times a year.  One situation to keep your eye on is the "fiscal cliff" problem that is brewing in Congress.  This is the term given to the set of tax increases and spending cuts that will go into effect near the end of 2012 if Congress doesn't figure out a solution.  Many agree that if an agreement is not reached, the country could dip back into a recession.  Obviously, Congress will wait until the last week/day/minute to get a deal done, and during that time the stock market will surely take a hit.  When this happens, you can then buy stocks at unreasonably low prices so you can make a nice profit on them in the future.

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