In order to build wealth over time, you must invest your money. There are no two ways about it. Yet, there are long stretches where the market marches sideways or even drops precipitously, taking with it the wealth of those invested. To make matters worse, from time to time, scandals erupt, shaking investor confidence in a company, sector, and/or the market in general. And yes, outright fraud sometimes strikes -- with disastrous results.
Being an investor can be quite unnerving. Huge crises are rarely predictable to the average outside shareholder -- they're often either hidden until they're too big to ignore or they're caused by unforeseen events that literally catch everyone off guard. With that kind of potential minefield awaiting, it's no wonder that many investors simply pile their money into index funds or simply avoid the market altogether.
Believe it or not, sometimes the best investments can be found in the wake of a crisis. As my former coach was fond of yelling, "That which doesn't kill you will only make you stronger." In the wake of a crisis, a surviving company just might present itself as the deal of the century.
Rising from the ashes
Of course, it's important to tell the difference between a crisis that kills and one that only causes a stumble. While out-and-out accounting fraud may have killed Enron, tremendous bargains appeared in its wake. Consider a company that:
- Was itself an Enron spin-off.
- Was the subject of an SEC investigation regarding purchase accounting practices.
- Was at the center of a 2003 gasoline shortage in Arizona.
Put all that together, and you have a company with headline risk written all over it. Yet if you take a look at Kinder Morgan's
Or consider the recent saga of fast-food pioneer McDonald's
There was a time, not long ago, when Ronald and his pals were on the ropes in the market. Yet, the clown still had some tricks up his sleeve, and confident investors were rewarded for their patience. Just as cigarette giant Altria
Oh give me a home
Since we can't fill our cars with gas without controversy, or grab a quick bite to eat without worry, perhaps we'd be safer just staying at home. If you have a mortgage (like me), you're probably out of luck there, too. Two of the biggest players in the home mortgage business have themselves been implicated in accounting scandals of their own. I'm speaking, of course, of home financing giants Freddie Mac
Much like the government that sponsors them, Freddie and Fannie have shown themselves incapable of keeping clean, understandable financial books. While Uncle Sam cheats by taking Social Security taxes to pay for general expenses, Freddie and Fannie were caught cheating by abusing the leverage power of derivatives to goose their results.
Yet in spite of their scandals, both companies remain fundamentally solid. In fact, as its scandal began to take on a life of its own, Fool value maven Philip Durell selected Fannie Mae for his Motley FoolInsideValue newsletter. Arguing that the scandal was depressing the price of the company to well below its true value, Philip made a compelling case that patience would reward investors when the controversy died down and the market restored Fannie to a more rational valuation.
Stop the pain
With all these hiccups affecting companies, it can be quite painful to invest even in the greatest companies, at least in the short term. It'd be understandable to reach for pain medicine to help with the inevitable headaches. Unless, of course, your painkiller of choice happens to be Merck's
At the peak of the fear surrounding Vioxx, Merck's shares could be picked up for more than 20% off their recent price of $32.63. That discount, along with Merck's yield, which was well above 5% and was covered even without Vioxx, and the best cure for the pain might have been to buy Merck stock when it was down.
vu all over again
Merck wasn't the only company tripped up by Vioxx. As it turns out, the cardiac problems weren't exclusive to Vioxx, but were a class effect associated with the type of drug to which Vioxx belonged. Pfizer
A word of caution
Of course, investing in companies in crisis comes with risk. If you're going to take the plunge, you must be reasonably certain that the company you're buying has the infrastructure to emerge from its problems. For every Kinder Morgan or Pfizer, there's at least one Enron or Worldcom, whose deceit will lead to bankruptcy. And, even if you're eventually right, the ride in the short term may be bumpy.
If you like the idea of finding value amidst crisis, but aren't sure of how to look for the ones that will survive, Inside Value is willing to be your guide. Click here for a 30-day free trial. You'll receive two stock recommendations a month, and you'll have full access to all 20 of our past picks. There is no obligation to subscribe and, as always, the Fool's money-back guarantee stands behind the offer.
Fool contributor and Inside Value team memberChuck Salettaowns shares of Merck and Kinder Morgan Management (a related company to Kinder Morgan). Merck is a Motley Fool Income Investor recommendation. The Motley Fool has adisclosure policy.