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Case Study: Fear Leads To Opportunity

|About: McDermott International, Inc. (MDR)

Crisis can breed opportunity.

In fact, that fact is what helped Warren Buffett amass his fortune.

His most famous quote is “be fearful when others are greedy and greedy when others are fearful” as well as “a climate of fear is your friend when investing; a euphoric world is your enemy.”

And he’s still living by those mottos.

In fact, in his most recent letter to Berkshire Hathaway shareholders, he noted:

"American business – and consequently a basket of stocks – is virtually certain to be worth far more in the years ahead. Innovation, productivity gains, entrepreneurial spirit and an abundance of capital will see to that. [... Nevertheless] many companies, of course, will fall behind, and some will fail. Winnowing of that sort is a product of market dynamism. Moreover, the years ahead will occasionally deliver major market declines – even panics – that will affect virtually all stocks. No one can tell you when these traumas will occur – not me, not Charlie, not economists, not the media.  [...]

During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be unwarranted. Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively-financed American businesses will almost certainly do well."

Even Peter Lynch once noted, “The very existence of doubt creates the conditions for a big gain in the stock once the fears are put to rest.”

Regardless of the message, the philosophy with such investing mottos was always the same -- Buying on excessive pessimism could be very profitable.

Look at McDermott International (MDR), for example.

After falling from a February 2013 high of $13.50 to $2.20 on the heels of crumbling oil prices, The Cheap Investor saw value, recommending McDermott at $2.97 in March 2016.  We knew that oil was likely to rebound well from a low of $27.50 at the time.  So, while others ran scared from oil-related stocks, we jumped in.

Then, as oil began to recover to $55, shares of MDR moved higher, as well.

In fact, MDR recently hit a high of $8.33 for a potential return of 181%.

We simply recognized the potential when most investors were afraid to buy, just as Warren Buffett and Peter Lynch do.

Over the last 36 years, we’ve used that same method to uncover unfairly ignored names, including ACADIA Pharmaceuticals, Vanda Pharmaceuticals, and Carmax.

The best part – we’re still finding opportunities just like these every month in The Cheap Investor.  In fact, our July 2017 issue just came out with some great recommendations.