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Should you buy shares in a company when it suffers a crisis?

Suppose a company suffers a major blow, one that wasn’t expected, does that represent a good time to buy?

Article updated: 14 March 2019 10:00am Author: Michael Baxter

I have been studying some past form, and it does indeed seem that sometimes a corporate crisis is an opportunity. But alas, not always, if you want to take this approach, only invest in a company that you believe has some underlying strength.

Suppose you had bought shares in BP after the Deepwater Horizon oil spill, suppose you had bought shares in Lloyds after the bailout, suppose you had bought shares in RBS — the list goes on, would you have eventually made a profit?

The answer is often yes, but not always.

Some successes

So I took some of the most famous examples of corporate disasters, and examined what has happened to the share price.

I took BP, Lloyds, RBS, Nokia, and Blackberry.

But frankly, investing in Lloyds or RBS at the time they were bailed out felt like a big risk. Shares in Barclays and HSBC also took a tumble. So I included shares in these companies, too.

I warn you, though, a couple of caveats are coming up.

This chart tells the tale from collapse to present.

Company Minimum price Price on March 13th 2019
BP 304 (June 2010) 536
Lloyds 38 (February 2010) 62
RBS 121 (January 2009) 261
HSBC 360 (March 2009) 626
Barclays 48 (January 2009) 162
Nokia 1.5 (July 2012) 5.43
Blackberry (RIM) 6 (December 2013) 9.43

The opportunity is revealed in the above figures.

Barclays, which was able to avoid a government bailout by the skin of its teeth, and Nokia which had experienced a long tradition before it became the world’s leading mobile phone company, enjoyed the strongest recoveries. An investor who put their money in at the low point would have quadrupled their money.

Survivor bias

Let me give the first caveat. The above table has survivor bias built in. I have not looked at Northern Rock, or Blockbusters or Eastman Kodak — there was never a right time to buy, the crisis just got ever worse.

Getting the timing right

The second caveat relates to timing. How do you know at the time that the share price had fallen to its low point? After the collapse of Lehman Brothers in September 2008, and following this strategy, you might have concluded it was a time to buy. Or you might have thought you had spotted a buying opportunity a year earlier with the Northern Rock bank run.

In fact, none of the four banks I mention have yet seen shares return to the level they fell to after the Northern Rock crisis.

Even investing after the collapse of Lehman Brothers would probably have yielded a loss, in most cases — as of today.

When it goes wrong

I don’t often talk about my mistakes here, but I did once invest in Laura Ashley after its share price had collapsed and upon watching a documentary about its new boss, who I thought seemed impressive. The share price continued to fall afterwards.

Irrational markets

There is, however, a simple reason why you can profit from following this strategy. The markets are not as rational as they are supposed to be.

The markets can fall victim to groupthink — as a result, they can on occasions get over exuberant, on other occasions they over do the panic. If you can divorce yourself from the pressures of groupthink, there are big opportunities.

Give it time

If there is one lesson I would take from my above analysis, it is that you should never try and find the perfect buying point. Because you will probably get it wrong.

Four years after the oil spill, after falling sharply again, the BP share price was only marginally above the crisis low.

Lloyds shares carried on falling after the bailout, reaching a low at the end of 2011.

Look for positives within a company before you buy, buying simply because the share price has collapsed is not a good enough reason, on its own.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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