Buying on bad news is a strategy commonly employed by savvy investors. The trick is to understand whether the problem is acute or will affect a company in the long term. A timely example of investors buying up stock on bad news is the market reaction to video dissemination of a passenger forcibly ejected from a United Airlines flight. On Monday, April 10th, the day after the public relations gaffe, United Continental Holdings closed up nearly 1%.
“It’s not entirely true that investors didn’t care about the incident,” according to Fortune. “United stock dipped as much as 2.5% in pre-market trading Monday, likely in reaction to video and news of the incident, which broke late Sunday, April 9th. But some investors swooped in to buy on that dip, sending shares up in trading after the market opened.” On Tuesday April 11th, United Continental Holdings stock dropped 4%, but closed down only 1%.
Warren Buffett took a hit to the tune of $24 million with the decline in United Continental Holdings. But United’s drop in stock may have created what value investor Buffett considers an ideal opportunity to purchase more shares. Buffett prefers to buy securities when they are trading at a discount and is well-known for advising investors to “be greedy when others are fearful” – namely, to take advantage of market selloffs to accumulate securities at depressed prices.
Investors took advantage of this opportunity because they felt that the bad publicity would only affect United in the short term. They are expecting United’s finances to continue to improve; the travel economy is strong and the company’s shares have risen about 33% over the past year. Importantly, shrewd investors understand that United is one of the Big Four airlines which together control 70% of the U.S. market, and that consumers have few options when it comes to domestic air travel.