Taking Advantage of a Disaster to Invest

by Kay Lynn

In life you have to always be on the lookout for opportunities whether it is for a new job, dream house or good investment.  The cruise ship wreck a couple of months ago presented one of those openings.

Carnival Cruise Ship Splendor Arrives at Port of San Diego

The Company

Costa Concordia is a ship from the Costa Cruise Lines which is owned by Carnival Corporation.  They also own six other lines including Carnival, Princess, Holland America, Cunard, Seabourn and P&O.

We’ve experienced cruises on three of the lines and I have been bugging my husband to invest in the company so we can get the shareholder benefit of on-board credit each sailing.  He always ignored me until the Costa Concordia disaster.

Corporate Disasters

Generally anytime something bad happens to a company the stock is going to take a dip, if not a dive.  BP stock plunged 52% within 50 days after the Deepwater Horizon disaster.  A share of Netflix stock sold for $300 and within five months had dropped to under $63 per share after a disastrous plan change.  Even though the plan to separate streaming and disc rental programs was rescinded after 11 days, the damage was done.

Carnival Corp. also experienced a stock drop of 18% in  two days; a drop of over $6 a share.  That’s when we decided to buy for several reasons.

Reasons to Buy

Even though the Costa Concordia event would depress cruise bookings initially, cruise bookings were quite solid and on the increase.  Carnival Corporation, as the largest in the business, was poised for success.

As shareholders we would get $50 to $250 to spend on the ship for each cruise we take on any of the lines.  Since we’ve already taken 8 between the various brands, this would definitely be a benefit we’d use.  We’ve already gotten $250 credit for our upcoming vacation.

Additionally, Carnival has historically paid a quarterly dividend.  This is becoming more important as we look at increasing our passive income in preparation for retirement.

Results

Already the stock has climbed nearly $4 since we bought it.  This despite another Costa ship having problems, though nothing like what happened to the Concordia.  We’re pleased with this stock transaction and will be on the lookout for other good companies that have bad things happen.

Have you taken advantage of a corporation’s problems to invest?

Related Posts Plugin for WordPress, Blogger...

{ 20 comments… read them below or add one }

Jai Catalano March 19, 2012 at 6:58 am

Hey that is how the world works. It’s taking advantage of opportunities people don’t see. I think if you sit back and wait long enough those opportunities arise as long as greed and fear are controlled by discipline.

Reply

Kay Lynn March 22, 2012 at 7:11 am

Jai, you’re right. It’s a new way of thinking for us, plus we now have the cash to do so!

Reply

Marina K. Villatoro March 19, 2012 at 9:07 am

Terrible, but the corporation is really well known and you know they will bounce back and probably out do themselves!

Reply

Kay Lynn March 22, 2012 at 7:12 am

Marina,

I do know they’ll bounce back. Just like I thought Starbucks would after they had to close 600 plus stores a couple of years ago. I’m not the only one that likes cruises and coffee. 🙂

Reply

Karunesh@chase-a-dream.com March 19, 2012 at 9:46 am

Taking up the advantage of a situation can work wonders. There are many people who have changed there fortune by foreseeing a situation

Reply

Dannielle @ Odd Cents March 19, 2012 at 5:22 pm

Good advice (thank-you). I never thought about that or even heard about it. Do you think that many people know about that logic and actually put it to use?

Reply

Kay Lynn March 22, 2012 at 7:14 am

@ Kaurnesh – I think a lot of smart investors can do this; it just seems like a new idea to me.

@ Dannielle, I think too many people are risk-averse to the point of hurting themselves. When the stock market drops a great deal, that’s a time to invest not pull out. Unfortunately, many people pulled out a few years ago and put their money in low rate savings accounts.

Reply

Squirrelers March 19, 2012 at 9:30 pm

You know, I think that many of these opportunities are the result of overreaction by financial markets. And yes, they do result in genuine opportunities at times.

Last year, I posted about how the Japanese market (Nikkei) plummeted in the aftermath of the tragic tsunami, but shortly thereafter came back strong and recovered. That was a buying opportunity, even if we all can agree that the circumstances were unfortunate and that we have to separate that from our decision making.

Reply

SB @ One Cent At A Time March 19, 2012 at 9:46 pm

Very useful advice. go in-line with my strategy to buy on every dip. I will keep an eye on disasters from now on.

Reply

Julie @ Freedom 48 March 21, 2012 at 5:46 pm

Great minds think alike! We did the exact same thing – and the cruise credit is a bonus =)
Advisors always say to invest in what you know and love… and we love cruising!

Reply

Kay Lynn March 22, 2012 at 7:17 am

@Squirrelers, Very true. I think of it as helping the company out by demonstrating faith in their products/services.

@ SB, Great strategy about buying on dips. You and Warren Buffet!

@ Julie, My husband keeps talking about selling at some point and I tell him we shouldn’t between the dividend and the cruise credit.

Reply

Paul @ The Frugal Toad March 21, 2012 at 7:20 pm

There are a lot of venture capital firms that look for opportunities to invest in firms that are undervalued for various reasons. They cut costs, bring in a turn-around management team, and then sell their investment when the stock price goes up.

Reply

Chris Rosin March 22, 2012 at 6:42 am

Hi, I’m Chris Rosin and I am current 10th grade in Singapore American School. This year I chose to take Finance as a course. My teacher, Andrew Hallam (you might have heard of him because he recently came out with a book, Millionaire Teacher: the Nine Rules of Wealth you’ve Should’ve Learned in School) has always stressed this idea. He stresses on the idea of diversifying your asset classes (either invest in real estate or bonds) and rebalancing your assets. He says that if one of his asset classes starts to fall he would put more money in that class because eventually it will rise again. If we look at the NASDAQ index, we can see that it dropped heavily in 2009 and quickly rose back up. During that time most people want to sell, but if you know that in the long term the stocks will rise again it would be better to invest more money.

Reply

American Debt Project March 22, 2012 at 11:16 am

This is the kind of thing that always makes me uncomfortable about being overly business-minded. A few years back, a Barron’s cover proclaimed that diabetes rates in America were expected to rise by some crazy percentage and the cover article was all about what healthcare companies to invest in to take advantage of this fact. Maybe it works for some people to invest in that way, but I’d rather focus on what we are doing to improve the health of Americans rather than how I can profit from other people’s misery. It happens enough in the world without me actively participating!
I’m not discounting your opinion and I’m sure you will do very well in your transaction, I guess I was just hoping you might mention that 28 people died and companies must constantly re-evaluate their leaders and safety procedures, and how equipped they are to handle emergencies. I’d be more interested in the company if it had used this opportunity to instill an even stronger commitment to safety in their operations. I work in construction so safety is our biggest concern. Casualties of civilian passengers is something I would take very seriously, not an opportunity to gain on-board credits for cruises in the future. I’m sure I sound totally self-righteous here (haha sorry!) but just trying to bring another perspective to this conversation.

Reply

Melissa@PersonalFinanceJourney March 24, 2012 at 1:18 pm

Of course, there is always the risk that the company won’t survive, but if it is a long established company, that is a risk I may take. Have you bought many of these types of stocks?

Reply

Long-Term Returns March 24, 2012 at 3:24 pm

Glad you made some money on Carnival stock, but what you are doing is not a good investing strategy at all. Dips in the whole of the stock market are buying opportunities, roughly speaking anyway, because the whole of stock market closely represents the whole of economy. Over time it’s a pretty good guess that the entire economy will keep on growing after whatever bumps. That is not the case with individual stocks at all, even established ones.

Dips in an individual stock could easily be just a preview of company’s impending bankruptcy. Just look at how financial stocks behaved in 2008. Companies go bankrupt or get bought at near-bankruptcy price all the time. The reason the stock market goes up over time is not because all or even most companies grow over time but because few grow a TON while most fizzle out. Picking individual stocks like you did is a good way to wind up a bunch of losers without any winners.

Unless you’re a Warren Buffett you have basically no valid way to know whether a dip is a temporary hiccup or an indication of larger trouble. An average stock will go down to zero sooner or later so buying individual stocks is on average a losing game. The only way you capture the growth of the stock market is by buying all companies to make sure you have the big winners along with all the losers. Which is what Warren Buffett recommends to individual investors who don’t have his experience and resources.

The rebound you saw in your stock is nothing than a reflection of the wider market rally. Carnival went from 29.60 (at close of Jan 17) to 31.91 (yesterday’s close). At the same time S&P 500 of which Carnival is a component went from 129.34 to 139.65. So it was 7.8% growth for Carnival stock versus 7.9% growth in the larger stock market index at the same time.

I would thank the lucky stars for that stock rebound, keep a share of Carnival to get those cruise discounts (that actually is a great value), and sell the rest and invest the proceeds into a diversified index fund such as VFINX or VTSMX.

Reply

Bret @ Hope to Prosper March 25, 2012 at 1:19 pm

I had just the opposite happen to me. Instead of taking advantage of the disaster, the disaster pummeled my investments. I owned a lot of unranium mining stock and they were on the upswing before the tsunami hit Japan. Now, they aren’t doing so good. I though about doubling-down, but I figured they would be depressed for a long time and I was right.

@ADP, just because people consider a disaster a buying opportunity for a stock doesn’t mean they don’t have compassion for the victims. Investors are often big contributors to the relief efforts.

Reply

American Debt Project March 25, 2012 at 5:08 pm

Thanks Bret for pointing that out, good point. I’m not knocking investing or investors. I just sometimes get uncomfortable about trying to depersonalize/dehumanize everything, if that makes sense. I understand the opportunity, I understand markets overreact, but I like keeping things in perspective :).

Reply

Miiockm March 25, 2012 at 7:51 pm

That is what you’re supposed to do. Buy low, sell high. Just make sure the company doesn’t drop off the face of the earth.

Reply

Jackie March 27, 2012 at 5:24 pm

I meant to comment on this before but got sidetracked. At any rate, what interested me most about this was the note that you can get shareholder discounts on the cruises. I wonder how many other types of companies offer discounts of that sort.

Reply

Leave a Comment

 

{ 2 trackbacks }

Previous post:

Next post: