What to Buy When There’s Blood in The Streets

Keith Fitz-Gerald Feb 14, 2020
2 

There’s an old investing adage attributed to Baron Rothschild, an 18th century British noble…

…buy when there’s blood in the streets.

Originally an ode to contrarian investing, I think it applies right now in light of the coronavirus situation in China.

Today we’re going to talk about just why this adage applies, as well as the best buy I can find, under the circumstances.

It’s probably not a good decision if everyone agrees.

Lord Rothschild knew how to pick winners.

Not only was he a powerful member of the Rothschild banking family, but Rothschild made a fortune buying during the panic in British markets, following the Battle of Waterloo against Napoleon in 1815.

It’s been relegated to a line in the history books, but back then, the battle was quite literally for world domination. Napoleon’s loss ended France’s aspirations for world dominance while also inadvertently installing that nation as one of America’s strongest allies. But, that’s a story for another time.

What matters for our purposes is that Lord Rothschild observed something fundamental to human behavior and big profits… that profits go to those who don’t run the other way when the you-know-what hits the fan.

That philosophy drives investing greats like Warren Buffett today, who has often observed that investors “pay a very high price in the stock market for a cheery consensus.”

It also drove the late Sir John Templeton who preferred to buy during points of “maximum pessimism.”

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Buffett, for example, famously purchased a $10 million stake in the Washington Post Co. during the bear market of 1973-1974 and watched over the years as it chalked up returns of more than 100 times the initial purchase price, according to Forbes reporter, Daniel Meyer.

Sir Templeton purchased shares of every publicly traded company trading under $1 on the New York and American Stock Exchanges on the eve of WWII, including 34 that were bankrupt. Less than four years later he sold ’em for a return of more than 400% as the story goes.

Buffett would go on to found Berkshire Hathaway Inc. (NYSE:BRK.A) and become a billionaire, while Templeton would ultimately create the Templeton Growth Fund Inc. (TEPLX) which turned every $10,000 invested at inception into what would be more than $6.05 million today.

My point in all this is that Lord Rothschild’s statement that you “buy when there’s blood in the streets” was, and still is, very sound financial advice.

Which brings me to China.

I can’t help but think that nation is not telling us the truth when it comes to the coronavirus and that the situation is far worse than they’re letting on. Reports sneaking out through “the great Firewall” – a not very flattering nickname for Chinese Internet censors – suggest there are bodies burning, people falling over in the streets and that hospitals are being turned into morgues.

There is quite literally and very likely blood in the streets there.

Which brings me to Tencent Holdings Ltd. (OTCMKTS: TCEHY).

Most investors know Tencent as one of the world’s largest gaming companies or as China’s largest social media platform and Internet company.

My focus, though, is on the company’s standing as one of five “national champions”, a designation Beijing bestowed on leading tech companies doing work with AI.

I am particularly interested in the work that the company is doing with computer vision related to online medical diagnosis. Right now, efforts are focused on an artificially intelligent computer vision system for Parkinson’s, but it’s not a stretch to imagine that shifting to remote diagnosis of other afflictions, especially if the coronavirus situation continues to worsen.

Tencent released a product called Miying in August 2018 that was the first of its kind and assists doctors with cancer screening for a wide range of diseases including esophageal cancer, lung nodules, colorectal tumors, and more. It’s already helping doctors improve diagnosis and assess patient risk with more than 700 diseases.

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This is a big deal.

According to the OECD, China has only 1.8 doctors per 1,000 people versus 2.56 per 1,000 in the United States and 5.1 per 1,000 in Australia.

China needs AI to cope with both the spread of the coronavirus and its trajectory.

Shares are trading at $52.70 as I type, according to Yahoo!Finance, and are proving unexpectedly resilient to coronavirus-related fears so far.

Many Western analysts are at a loss with regard to why, but my experience in China makes me think that QQ and WeChat – the company’s media and social networking platforms – are largely responsible.

Both play a key role in helping millions of Chinese stay updated on the latest news, medical advice, and government efforts to contain the virus. Especially as online chatter increases.

Taking a page from Lord Rothschild’s playbook, I see the coronavirus crisis creating a new boom in everything from e-commerce to online diagnosis and treatment. I also see the spike as a way for the Chinese government to implement truly effective treatment.

It’s worth noting that Tencent is also making an effort to “play nice” with key US companies including Apple, which reportedly now receives 30% of online “tips” related to firewalled content on WeChat.

Tencent also has large holdings in online streaming platforms like Douyu and Huya, which will benefit nicely from virtual reality development efforts that augment existing social media apps, services, and data processing.

The best way to buy Tencent would be on a virus or trade-related dip, but I’m not so sure you’ll get that opportunity if prices prove as resilient as they’ve been to date.

Consider using a Total Wealth Tactic like Dollar Cost Averaging or its closely related cousin, Value Cost Averaging, to accumulate shares and minimize risk at the same time as an alternative.

The coronavirus may be just what you need, even if the doctor didn’t order it and even if there’s more selling ahead!

Until next time,


Keith

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