How Much Blood?

Nathan Rothschild is credited as saying “The time to buy when there’s blood in the streets.” It is one of the all-time great quotes about investing. It’s right up there with Warren Buffett’s “buy when others are fearful.”

If you’re a contrarian investor, you know these quotes by heart. Because buying stocks or other assets that are out of favor is a great way to get ahead of the crowd, to get in before the pendulum swings as it almost always does.

Still, something is missing from the “blood in the streets” quote: volume…

Volume, as in: just how much “blood in the streets” does there need to be before the time is right to step in and start buying stocks?

The unfortunate truth is that Rothschild didn’t really have a methodology for determining when enough blood was enough. History says he probably cheated…

The historical record isn’t completely clear, because the carrier pigeons that brought Nathan Rothschild the news that Napolean was defeated at Waterloo took that secret to their tiny little graves. So when ol’ Nate stepped in and started buying stocks on the British exchange two full days before official word hit the press, he cashed in from a savvy move to get information ahead of the crowd.

His suggestion that he waded into the fray because of some 6th sense for market timing is just mythos-building. But it worked. We’re still talking about this quote today…

The Buffett Mythos

We could ask a similar question of Mr. Buffett: “So you say investors should “buy when others are fearful,” but how do we know when that is?

If you had money in the stock market on Friday, March 14, 2008, the day when shares of Bear Stearns fell 47%, you were no doubt fearful. And I’d say that the failure of one of the oldest Wall Street investment banks would count as a lot of blood in the streets…

The S&P 500 was around 1,300 at the time. Thinking that the Bear Stearns bankruptcy was an isolated event and marked a bottom for the market, investors pushed the index 10% higher over the next two months.

Then the blood really started flowing: the S&P fell 56%(!) over the next 10 months, hitting an ironic low of 666 on March 9, 2009.

Now obviously this is an extreme example. The S&P 500 doesn’t always fall by 56% when the sellers take over.

Buffett often gets credit for how he managed Berkshire-Hathaway during the Great Financial Crisis – as if he swooped in at the market lows and started buying. The truth is a little different…

He bought 9 million shares of Bank of America around $50 a share in mid-2007, right before Citigroup cut its dividend and officially kicked off the GFC. He sold those shares in two big chunks: one in 2008 at $29.79 and again in 2010 at $12.24…

His famous idea to buy back into Bank of America – that he supposedly had while in the bathtub – actually came in 2011. And it was a sweetheart deal that included warrants that he could exercise to buy the stock at $7, which he obviously did – in 2017 when the stock was over $20.

Buffett did step in and invest $5 billion in Goldman Sachs during the GFC — in September of 2008 at $115. It would be 6 more months before the S&P 500 bottomed. Goldman Sachs shares traded as low as $47.

On paper, Buffett suffered $12.9 billion in losses in 2009.

What we should appreciate about Buffett’s approach to the worst bear market in a generation is three-fold:

He didn’t panic sell
He looked for opportunity
He was steadfast that the U.S. economy would recover

The point to all this is that there is no magic bullet. Good contrarian investing is mostly about good information (Rothschild) and common sense (Buffett).

Common Sense in Today’s Market

Where to begin…

We’ve got memecoins going from $0 to $100 and back to $0 in the blink of an eye…

We’ve got forecasts that Bitcoin is going to $1 million when it can’t even hold $100K…

We’ve got AI stocks that can tank 15% in a day because of one Chinese AI chatbot…

We’ve got “old economy” stocks like Walmart trading at all-time high valuations…

We’ve got one company – Nvidia – reporting after the close today – and it seems the whole market hangs in the balance…

I don’t have much of an opinion on Nvidia’s earnings today. The best case scenario is that the company does well enough to avoid tipping the apple cart. Because when the most important stock on the market trades at 29 times revenue, the best one can hope for is that Nvidia doesn’t call attention to the fact that common sense has left the building.

I’m looking at Hammer’s moves into gold and silver stocks this year – moves he’s written about here in Outsider Club, moves that have made his American Stock Investor subscribers a slew of 50% – 80% gains and I’m thinking “Hmmm, I guess that’s where the common sense went… Want to find out how to get in on the gains like that for yourself? Click here for all the details.

Cheers,

Briton Ryle
Chief Investment Strategist
Outsider Club

X/Twitter: https://twitter.com/BritonRyle

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