One Lesson of the Financial Crisis: It Pays to Lose Money
Posted on October 27, 2009
One of the main lessons of the financial crisis is simply that the best way to make a lot of money is to lose piles of it.
The big banks, of course, are masters of this strategy, and the recent mortgage debacle is only a recent example of their prowess. Nearly every five years or so, banks devise some new method of losing obscene piles of money, and then demand government funds to stay afloat. Though, I haven’t added up all the numbers, it’s probably safe to say that a large part of the profits of banks during the boom years, are really simply the “amortized” gains from prior bailouts. Surely during this latest financial crisis, many of the big banks simply ended up with record profits following government intervention.
But, the “lose money” strategy is not confined to big banks. Internet start-ups amazingly still play the game quite convincingly, as do all the biotechs. And small investors too can profit from this strategy, as well.
Developing an Investment Strategy Around Money-Losing Companies
For nearly a decade, I’ve theorized, and put into practice a simple investment philosophy, whose returns blow away nearly all hedge funds (even those with insider information). The strategy: Buy companies that are losing money.
Of course, it’s not that simple, but, in general, the most profitable investments by far, are in those companies that are currently losing tons of money. The devil, as always, is in the details (and the timing), but there are strong logical justifications for this approach, which I hope to get to in future posts.
A Quick Case Study: NAVI
In case you’re itching for a recent investment example, look no further than NAVI (though BAC and host of other bankrupt financials are perhaps better case studies).
Today, NAVI came out with their 10-K and my favorite line is:
“We have a history of losses and may never achieve or sustain profitability. We have never been profitable and may never become profitable. As of July 31, 2009, we had incurred losses since our incorporation resulting in an accumulated deficit of approximately $519.6 million.”
Does this bother me? Not in the least bit. NAVI is up some 200% since I entered a position in this perennial money-loser and I expect the stock to finish the year strongly, as well, as the company proceeds to announce some key asset sales.
I’ll have more to come on the “lose money” investment strategy in the future, but for now, I draw your attention to this recent article about Twitter, the money-guzzling Internet phenom that is now worth $1 billion.
http://blogs.wsj.com/deals/2009/09/24/breaking-news-twitter-to-raise-100-million-from-insight-t-rowe-price-other-investors/
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