There's an ugly phrase that investment analysts like to use, and it seems particularly fitting in these troubled times: the best time to invest is when there is blood on the streets.
It is a harsh metaphor, but its meaning is clear. There is money to be made from disaster and panic. This doesn't have to mean physical violence, although it sometimes does. It could be a stock market crash, a financial crisis, a natural disaster or, yes, a blood-soaked revolution. Either way, when investors are indiscriminately selling off the good with the bad in a frenzied flight to safety, a cool-headed investor can pick up some bargain stocks.
And when the panic recedes and markets rally, they will have made a killing. Call it disaster investing, if you like.
No, it isn't pretty, but that's how many successful investors operate. The question is: does it work?
Just think of some of the financial and economic crises of the past couple of decades. The Asian financial crisis in 1997, the Russian rouble crisis in 1998, the dotcom crash in 2000 and the credit crunch in 2008. Right now, we have three crises on our hands: the euro zone, the North Africa and the Middle East and Japan.
All these crises hit local or global stock markets, to a greater or lesser degree. Did these prove to be good times to invest? The answer is often yes, but only the quick and the brave will have cashed in.
All eyes have been on Japan in recent weeks following the devastating earthquake and tsunami. If it feels indecent to talk about investing while the country is still in shock, remember that disaster investing isn't for the squeamish. You could also argue that the country urgently needs investment right now to power its physical and psychological recovery.
Japan has been here before, after the Great Hanshin earthquake damaged the city of Kobe in January 1995, causing US$100 billion (Dh369bn) worth of damage and knocking 2.5 per cent off the country's GDP. The Nikkei 225 fell 8 per cent over the next five days, and 25 per cent in total by the middle of the year. Yet in the next 10 months, it rebounded more than 50 per cent.
That was a great time to invest, if you got your timing right. What about now? When the Nikkei reopened after the earthquake and tsunami last month, it fell more than 6 per cent. It continued its free fall in the days that followed, with losses approaching 20 per cent. It could fall further still.
Yet this could also mark a turning point in Japan's fortunes. The Japanese united to rebuild their nation and create an economic miracle after the Second World War, and the recent disaster could inspire a similar recovery.
After two "lost decades" of market decline and stagnation, this could finally be the time to invest in Japan, says Steve Gregory, the managing partner at financial services company Holborn Assets in Dubai. "I have been discouraging investors from buying Japanese funds for as long as I can remember, but the tsunami could change that. The huge infrastructure spending could boost GDP growth and prove a great opportunity for investors."
There is one disquieting difference between now and the 1995 Kobe disaster - the prospect of a nuclear aftershock at the Fukushima nuclear power station. The risks remain huge.
A major disaster can also create opportunities far from its epicentre. Any fall in Japanese industrial production could be made up by competing companies in other lands, says Sherene Ban, a London-based client portfolio manager at JP Morgan. "Large amounts of Japanese production have been taken out, some of it permanently," she says. "This should have positive benefits for competitors in South Korea and Taiwan, in sectors such as refining, chemicals, autos and steel. Compelling individual stock stories are now happening all across Asia."
Financial disasters have repeatedly shaken markets, but the rebound is often spectacular.
Within two years of the 1994 Mexican peso crisis, the economy was in fiesta mode and five years later, GDP was rising by a healthy 7 per cent a year. Led by Brazil, Latin American markets have soared over the past decade.
At the peak of the Asian crisis in 1997, many feared contagion would trigger a global economic meltdown. Within two years, the recovery was firmly under way, and Asian markets have led the world ever since. Anybody brave enough to invest in the early stages of the recovery should have made a fortune. Russia also roared out of the 1998 financial crisis, fuelled by the soaring oil price.
We all remember how strongly markets rebounded just months after the global credit crunch struck. The US stock market has doubled since March 2009 and the UK's FTSE 100 is up 70 per cent, largely thanks to the sugar rush of low base rates and quantitative easing.
To quote Shakespeare: "There is a tide in the affairs of men that, taken at the flood, leads on to fortune."
The trick is catching that flood. Take technology. The dotcom bubble of the late 1990s first punctured on March 10, 2000, but such was the shock that technology stocks continued to fall for the next four years. Anybody who dived in too soon, hoping to pick up some cheap stocks directly after the crash, will never have recouped their losses.
And although there have been individual dotcom successes, such as Apple, Amazon and Google, picking winners out of the rubble was a precarious business.
At other times, it does pay to dive in. Western stock markets fell by up to 10 per cent following the Japanese earthquake and tsunami and worries over the Middle East and Libya, only to recover their losses within three weeks. Investors didn't have long to cash in.
"Disaster investing can be a powerful strategy, but it is risky," says Spencer Lodge, the regional managing director at financial brokerage PIC Middle East.
To make the right call, you have to consider two things: how long you are investing for and the quality of the share or market before disaster struck.
"Your time line must be generous. Typically, values recover quicker after a natural disaster than a political upheaval, but you have to give it time," Mr Lodge says. "You must also consider the underlying fundamentals of the market. If it is essentially strong, but temporarily paralysed due to a disaster, this could be a great opportunity. If it has underlying problems, the disaster could magnify them and there is little to gain from rushing in as prices fall."
A crisis doesn't have to be a global affair. It might be restricted to a single company. Just look at oil major BP, whose share price sank from £6.50 (Dh38.53) to about £3 following the Gulf of Mexico oil spill last year. With BP shares now trading at about £4.70, there was a great opportunity, says James Thomas, the regional director at Acuma Wealth Management in Dubai. "Looking back, the share was clearly oversold and clients who bought in at the low point are sitting on healthy profits."
Picking the right time to buy is like trying to catch a falling knife, and you can get badly hurt. "It takes courage and conviction to call the right time to get into the market. Some jump too early and make a loss, others jump too late and miss the lowest price," Mr Thomas says.
Disasters can be a great time to buy, but a terrible time to sell. If you are investing for the long-term, don't be rattled by a short-term panic. If you sell as a result, your paper losses will crystallise into real losses, plus you are likely to miss any subsequent rebound. "So unless you are day trading, the best advice is to sit tight."
Disasters don't always create opportunities. Markets can respond in perverse and unexpected ways. Hurricane Katrina swamped parts of New Orleans and knocked 1.7 per cent off US GDP, but US markets actually rose 1.3 per cent in the days after the disaster struck.
South Korea and Thailand shrugged off political worries to become two of the best performers last year, says Steve Gregory at Holborn Assets. "South Korea leapt 70 per cent, even though it was hit by missiles from North Korea, and Thailand rose 45 per cent, despite suffering serious political unrest. Who could have predicted that?"
If people are selling indiscriminately, don't buy indiscriminately. Be selective. "The Egyptian stock market closed on January 27 after dramatic falls," Mr Gregory says. "When it reopened 38 days later, shares fell 9 per cent. Yet companies that had no connection to the previous regime did well. Three days after reopening, the EGX 100 moved up 7 per cent, and Egypt was back in business."
The renowned investor Warren Buffett once said successful investors need to be "greedy when others are fearful, and fearful when others are greedy". Buying at the moment of maximum fear can be hugely rewarding - if you have the stomach for it. But you should only commit a relatively small part of your portfolio.
Disasters are, almost by definition, unpredictable. If you make the wrong call, the metaphorical blood on the streets could be yours.
