Generally speaking, some of my best stock picks have happened when the company is under duress. Assuming the company is able to survive/turnaround, you've made several times your investment simply because so much of the perceived risk has disappeared. For example, I bought Fairfax back when it was at $100 and sold several years later just shy of $300 (pre-blog). I bought USG at the height of the financial crisis, and here's how it turned out: http://mevsemt.blogspot.com/2010/04/transaction-alert-sold-usg.html.
In fact, if you look at some of the best investments made by the great investors, you'll see they've done the same thing (Buffett - Geico & American Express, Berkowitz - Wells Fargo). Of course there's a risk to this approach - maybe the market is right, and there's always a chance the company could indeed fail! In fact, I bought AIG just as the financial crisis was hitting the fan, and lost over 50% before selling.
With this in mind, on Friday I decided to add to two of my "stressed" positions, and sell one of my holdings where I may have overestimated the upside. Specifically, I bought an additional 500 shares of JEF at $9.92 and 1000 AIG warrants at $5.37. The stock I sold was MIL (formally Terra Nova) at $6.80 (2268 shares).
Questions? Comments? Email mevsemt@gmail.com
