There is blood on the streets of Egypt as protesters and riot police clash in violent confrontations. As a result, Egypt's stock market -- which reopened on Thursday -- has closed down 10.52 percent. From January 4, it has plunged about 22 percent in value.
There is a saying on Wall Street, attributed to 18th century British banker Baron Rothschild, that advises investors to buy when there's blood in the streets.
Should investors, then, buy assets (including but not limited to equities) in Egypt as other frightened financiers frantically sell?
The answer depends on two key factors.
One, investors can't be too early. For example, if they thought the toppling of Tunisia's government was as worse as it gets for Egypt, they may have bought Egyptian assets, which declined because of fears that the revolt will spread from Tunisia.
As we now see, the revolt did indeed come to Egypt; Tunisia was just the tip of the iceberg for Egyptian assets.
Currently, Egypt's government is still in power.
If investors decide to buy now, they may still be too early because the Egyptian government may later topple.
Instead of Egypt, investors should perhaps consider Tunisia, where things are so bad that the stock market has been suspended indefinitely.
Two, investors must decide if the 'blood in the streets' event will alter the long-term prospects for the country's economy and investors.
During the 18th century, Europe saw its share of wars and blood in its streets. However, the trajectory of economic expansion and capitalism always continued. So when investors bought in times of turmoil, they came out ahead.
Similarly, buying after bloody wars in the U.S. (e.g. the Civil War) was a profitable move.
However, if investors bought assets in North Korea and Cuba after their revolutions, they would have lost their money.
North Korea and Cuba are extreme examples because they adhere strictly to the codes of Communism that violate investor rights and cripple the economy in the long-term.
Historically, Tunisia and Egypt are seen as countries that have the potential to be prosperous and modern states in North Africa, so they will probably not go down that path (but there is always the risk they will).
History also shows that investors are prone to extreme emotions of fear and greed; they buy too much just before the market crashes and pass up cheap bargains at the height of pessimism.
As the social and political upheaval erupts in Egypt, investors have the opportunity to scoop up distressed assets at bargain prices. These investments will probably be highly profitable as long as they don't buy too early and Egypt avoids the fate of North Korea.