This Fool successfully invested his way out of the financial crisis via Barclays (LSE: BARC) and BP (LSE: BP).
The credit crunch hurt the economy, businesses and consumers. Investments also suffered badly.
The FTSE 100 (UKX) was trading at around 6,500 when the credit crisis erupted in 2007. At the worst point, the index fell to 3,500 and it has never recovered to reach the pre-crisis high. Indeed, since the low of March 2009, the FTSE has hardly ever traded above 6,000.
My portfolio suffered badly in the credit crunch. However, a string of recent successes has taken my portfolio to all-time highs. Here are some of the lessons I've learnt when recouping a small fortune.
1) Buying when the boss takes the stand
Contrarian investors often suggest that we should buy shares at the point of maximum pessimism. Identifying that precise moment is incredibly difficult, however.
Earlier this year, Barclays (LSE: BARC) lost its boss Bob Diamond in the wake of the LIBOR scandal. The bank's share price had fallen sharply and sentiment towards to the company was at a low. I took the plunge and bought shares in Barclays on July 3rd, the day before Mr Diamond was due to appear before a parliamentary panel investigating the bank's role in LIBOR-fixing.
I sold my Barclays shares towards the end of August for a quick 15% profit. Although the shares have since risen further, I'm not annoyed to have missed out on those gains. At the time, my exposure to other banks was already very high.
I reckon Barclays has the potential to continue its rise. Analysts are currently forecasting earnings per share of 34.5p for 2012, rising to 37p for 2013. At 243p today, the single-digit P/E does not expensive.
2) Making it back the way I lost it
Following the financial crisis, many investors I speak to are determined to avoid banks. The reasons they often give are: the possibility of harsher regulation, further eurozone losses, and regulatory fines for past misdemeanours.
I think the real reason these people are avoiding the banks is because they are 'chicken'.
True, a lot of investors lost money on banks during the financial crisis -- and I was one of them. However, such losses do not mean bank shares should never be bought again. In fact, investors scarred by past losses have missed some huge gains. In particular, shares in Lloyds Banking (LSE: LLOY) are up 75% in the year so far.
Lloyds is expected to restart dividend payments in 2013, and the resumption (if or when it occurs) will be a significant milestone in the company's rehabilitation.
So by holding Lloyds, I've found just because a previous investment or particular strategy has failed in the past, does not mean it can never reward you in the future.
3) Betting BP would survive
The 2010 Deepwater Horizon disaster in the Gulf of Mexico claimed 11 lives. It almost took one of Britain's biggest companies, too.
During April 2010, BP (LSE: BP) was considered one of the bluest of blue-chip companies. The shares were trading above 600p and the sterling-based dividend had risen every year since 2004. Deepwater Horizon was a failing of such magnitude that investors had started to think what had previously been unthinkable: could BP collapse?
As the political pressure on BP reached a crescendo, the company demonstrated it was getting on top of the spill. The twice daily reports confirmed an increasing amount of oil was being collected safely by BP. For the first time, BP's response was winning some credit. I took this as my cue to buy.
Spill-containment efforts progressed and eventually the political rhetoric wound down as 'the story' moved on. During June 2010, BP agreed a $20bn claims fund, which helped cap expectations of BP's eventual losses.
Calling this one right produced one of my biggest percentage gains since the financial crisis struck. Within six months, shares in BP were 50% higher.
4) Owning high-beta shares ahead of a market rise
Majority state-owned bank Royal Bank of Scotland (LSE: RBS) is perhaps the UK firm that best represents the credit crunch. The company was only saved from bankruptcy by a massive injection of cash from the taxpayer.
Today, its shares remain volatile. In good times, people speculate on how quickly the bank's profits could improve if the economy turned. In bad times, speculation ramps up over whether RBS may need even more capital.
The result is that RBS has become a 'high-beta' share. In other words, its price movements exaggerate the changes in the wider market.
As the eurozone crisis rumbled on, I became increasingly convinced the issues were political and could be solved by willing eurozone politicians. I held on to my RBS shares in the hope that a solution would lead to large gains.
On September 6th, the European Central Bank announced plans for a new bond-buying plan. This soothed the market panic and sentiment began to pick up. The FTSE 100 (UKX) has since increased about 2%. In that time, RBS has advanced a huge 30%.
If your analysis leads you to expect a market rally is just around the corner, high-beta shares can be an excellent way to capitalise.
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> David owns shares in Lloyds Banking and Royal Bank of Scotland.
