Awhile ago, I wrote an article for you called "Making Money in Bad Companies". In it, I detailed a strategy, famously proposed by Ben Graham in Security Analysis, that would allow an investor to make a financial windfall from investing in the common stock of a second-rate player in a dismal industry that was temporarily experiencing reported negative, or depressed, earnings.
Using this method, I recently put a large percentage of the current assets of one of the companies in which I have a major investment (a letterman jacket and luxury gift business called Mount Olympus Awards, LLC) in the stock of a specialty retailer currently undergoing a restructuring. Ordinarily, there’s a three to five year time frame during which I expect the process to work out but, fortunately, in the past two weeks, the security is up roughly 25%. This type of investment isn’t my usual fare - I prefer businesses that have stable earnings, buy back lots of stock, pay ever-rising cash dividends, and have high returns on equity with little or no debt. It goes to show, however, that by knowing a little financial history, it’s easier to emotionally detach yourself from the market, making - in very limited circumstances when ephemeral opportunities present themselves - a huge profit. This is the very spirit behind what Berkshire Hathaway Vice Chairman Charlie Munger said, "Be prepared, act promptly, in scale, on a few major opportunities." This was coming from a man that would build up tens of millions of dollars in treasury bills just waiting for these types of mouth-watering investments to come along. How many people do you know that have that kind of discipline and aversion to risk?
Of course, this method is not for anyone who isn't being assisted by a professional or who has a deep understanding of their own finances and are willing to take on much higher risk assets that are likely to have exponentially more volatility. The truth is, I almost hesitate to tell you all about these sorts of things because there are a small minority of people that don't understand quick payoffs like this are not the norm. You must be willing to maintain your course, provided that your investment thesis holds true, despite market conditions. Uncovering opportunities such as this require months of exhaustive research and a deep understanding of accounting so you can tell when the numbers make sense. Don't buy a get rich quick scheme and lose your life savings! Image property of Getty Images.