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Buying Stocks When Nobody Wants Them

4 October 2010 5 Comments

Buy low and sell high.  Everyone knows it’s what we’re supposed to do, but it’s unfortunately what most of us fail to do in investing for ourselves.  Our emotions push us to do the exact opposite.  We sell when stocks have already dropped and we buy when they’ve already had huge runs.  Occasionally, we get lucky and make a little money with our terrible timing.

In order to buy a stock when it’s low and a good buy, you essentially have to buy it when nobody wants it.  A stock market means buyers and sellers move the stock, so for a stock to go low, most people have to be selling it, not buying it.  Going against the grain is difficult.

Fortunately, I was able to do just that fairly recently.  I bought a stock when nobody wanted it and now it is up 30% in a few months.

That stock is Transocean LTD (RIG).  At the peak of the Gulf Oil Spill debacle, RIG was trading approximately 50% off its 52-week high because it was tied to the oil rig that sank and caused the spill.  As I mentioned here on this blog, I bought the stock because most of the media frenzy was focused on BP and Transocean was likely to get penalized for the incident but the stock was trading like it was going to get killed.  I didn’t think it would happen, and Transocean is an incredible company that works around the globe, not just in the Gulf of Mexico.

Now, I bought the stock for a few pennies over $50 a share, and the stock did trade under $42 a share, so I didn’t exactly buy it at its low, but beggars can’t be choosers.  The stock is now in the mid $60’s and even better, the company recently reiterated that it will be paying a dividend that is close to a 7% yield based on my entry point.

RIG still might have room to run, and I’m not really interested in selling it since I’m happy with my entry point, but I’d say that the quick money has been made.  I think the company is great and I’m willing to hold on to it.  You could buy RIG at the current price, and in the long term, it might not matter where your entry point was, but I’ve got a 30% cushion on the position that makes it easier to hold this position through some short term volatility.

There is another time in recent years that you were able to buy an amazing company when nobody wanted it (there are plenty of examples, I’m sure).  Remember all the rumors around Steve Jobs health that combined with the overall bear market drove Apple’s stock to around $70?  The stock is up nearly 4x since then.  Again, another example of a company that was still doing amazing but the stock was being sold by everyone.

This is the key to beating the markets.  Staying extremely patient and buying quality companies when nobody wants them.  If you can collect an above average share of dividends while you are patient, even better.  It might mean not buying anything for years but building cash from dividend payouts.  You’ll have plenty of dry powder to buy that next company when nobody else wants it.

5 Comments »

  • EV SSL said:

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  • Andy Djordjalian said:

    Great point Kevin. Stocks that are out of favor are often disregarded by the press too, as people are also disinterested in hearing about them, which only makes matters worse for those companies but better for patient investors doing their homework.

    I would only emphasize that a contrarian view by itself is not enough, you need to see if the stock is disliked for unjust or exaggerated reasons, like you did with Transocean.

  • michael61 said:

    This is *so* true. I had $2000 to invest in my sons college fund. I picked up 200 shares of Apple for $9.25 a share back in 2003 and it's now worth $54,000. He's in high school so it's time harvest the gain. I'm a very happy camper!

  • 20smoney said:

    200 shares of Apple at $9.25 a share is quite a buy. How'd you manage to hold off from selling it at $100 or $200 or $250?????

  • Samantha said:

    If you want to increase your income trading stocks can be an option. I consulted with my new jersey cpa and decided to invest 2000$ in different companies. Your advices may help me obtain a nice profit/.