Tuesday, February 3, 2009

Phoenix Rising

"All financial crises end-- and when they end, they end in ways that create spectacular opportunity" Lawrence Summers

I don't think it's much of a stretch to agree with Prof. Summers. Just as this is the worst financial crisis in our lifetimes, it will eventually produce some of the best money-making opportunities that we've ever seen. Of course, the trick is to find them and to get the timing right. But there will be plenty to be found. I've got some initial thoughts.

Obviously the public securities markets will offer some great chances to buy stocks and bonds at distressed prices. I've written quite a bit about the ability to buy franchise companies at incredibly cheap prices. Big returns if you catch the bottom, but most investors will do well to accumulate stock in high quality companies and hold on through the eventual recovery.

Some of the biggest fortunes have been made by investing in real estate during economic downturns. Certainly the Sam Zell types who get it right stand to make billions. But I've been approached by a few people with small deals that reflect the pervasive damage of the recession-- to make up an example, the guy who owns a small strip mall is unable to roll over his bank note and what was once thought to worth $5 million will be sold to a heavily discounted bid. These deals are out there, and there will be more. I'll bet that your local commercial real estate broker is in touch with lots of situations. In fact, they have started sending flyers (first-class mail) advertising local commercial buildings to
residences in my town. What makes them think that my neighbors and I would be interested in a local 60,000 square foot office building? Apparently all of the traditional buyers are out of the market. Sam Zell I'm not, but at the right price, I'd be interested as a part of a group.

Most interesting will be the cherry-picking breakups of big but wounded companies. Things will be very different coming out of this recession, and many traditional business models will no longer work. However, parts of businesses will still be attractive under different terms, with different management. Here's what you'll be seeing: displaced senior executives at large firms that have taken a beating will start companies to compete with their former employers. They'll successfully bring coworkers and customers, and they'll compete very effectively because they won't be saddled with the legacy issues. It's a perfect model for service companies: XYZ is in dire financial straits, so a former SVP recruits salespeople and starts ABC Corp. targeting the same client base. Think about it from several angles: the upside by joining ABC Corp, but also the downside if you're an XYZ shareholder.  And think about service companies broadly-- including financials.  I'm pretty confident that you'll be seeing lots more on this topic in coming months.

Portfolio Update:

Added to my CAT position as it touched 30. Also, I just couldn't help myself and I doubled up on NYT when it traded under 5.

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