Lesson No. 3: Use what you have learned about your stocks to make shorter-term trades during the crisis. If you don't curl into a fetal ball because of the shame and pain of your losses, and if you don't get hung up on getting back to even, you can make a profitable trade or two out of the extreme volatility of any crisis.
I've taken a lot of heat in the comments to my posts on my recent recommendation that you hold on to Banco Santander, trading at $6.34 on April 18 with a target price of $8.85. Many readers rightly noted that even if the stock got back to $8.85, it would still be well under the $10.20 price on May 28, 2010, when I added the ADRs to my Dividend Income Portfolio. I won't pretend that the almost 38% drop in the share price since then is anything other than painful. But it's also irrelevant to the chance to make almost 40% now, if the current extreme fear is overstated and a rally, like the one in January, takes the price to $8.85 -- even if only temporarily. You either agree or disagree with my argument for that price. If you agree, you shouldn't let the drop from the May 2010 price stand in your way.
The European debt crisis and the market reaction to it also demonstrate that the bath water isn't equally deep every place that's touched by the crisis. Even a conservatively run, overcapitalized bank like Sweden's Svenska Handelsbanken (SVNLF), which trades as SHBA.SS in Stockholm, takes a hit when fears rise that Spain might need a bailout. From April 26 to Sept. 8 2011, for example, Svenska Handelsbanken shares fell 24.8%. But recently, while Spanish banks were getting killed, Svenska Handelsbanken barely budged. From March 14 through April 18, shares dropped 4.6%. That's hardly a scratch on the 32.5% gain the shares recorded from Nov. 24 through March 14.
Lesson No. 4: Your decision on whether to toss everything with the bath water should change as a crisis ages. I'd argue that what has happened to Svenska Handelsbanken is typical of a long-lived crisis. In the initial stages, everybody sells everything, because the dimensions of the crisis and the mechanics of how the crisis impinges on a specific stock are relatively unknown. Selling everything actually makes sense at this point; it allows you to sort out the nature of the crisis from the safety of cash.
But as the crisis moves along, investors start to understand what makes a stock vulnerable and what qualities shelter it from some of the worst aspects of the crisis. Right now, the big debate in Sweden isn't over bad debts on bank balance sheets or how banks are going to get access to the financial markets, but rather over whether Swedish banks are raising too much capital. Regulators have decided that Swedish banks need to target a 10% core Tier 1 risk-weighted capital ratio from January 2012 even though the new Basel III rules call for only a 7% capital ratio and even though the European Banking Authority has set a 9% ratio for the most systemically important banks.
That has left Swedish banks such as Nordea (NRBAY), which trades as NDA.SS in Stockholm and is the largest Nordic lender, fuming that regulators are placing a huge handicap on the country's banks. Of course, Nordea is making those complaints while sporting an 11.2% capital ratio at the end of 2011. You don't have to follow the ins and outs of the eurozone debt crisis in great detail to know that Nordea and its Swedish competitors aren't your typical eurozone banks and to go from that to treating them differently when fear rises across the sector.
My fifth baby-and-the-bath-water rule follows logically from Rule No. 4.
Lesson No. 5: At some point in the aging of a crisis -- past the stage when investors are discriminating between the exposure of individual stocks to the crisis -- the "safer" stocks like Svenska Handelsbanken are no longer the best bets for big gains. Riskier stocks that have had more exposure to the crisis are likely to outperform going forward.
I think you can see this in the U.S. banking sector, where U.S. Bancorp (USB), one of the bank's least damaged by the global financial crisis clearly outperformed Wells Fargo (WFC), which took some hard hits back in August through December 2011. Since the middle of February, however, and especially since mid-March, Wells Fargo has outperformed. The bank stock that took the harder hit in the crisis has become the outperformer as the crisis has faded. You can see a similar pattern if you compare the performance of Wells Fargo with that of Bank of America (BAC), which was among the banks hardest hit by the crisis. From November 2011 through February 2012, Wells Fargo outgained Bank of America. Beginning in February, however, Bank of America has clearly been the faster horse in this race.
Putting these rules to work
How would I apply these five rules to some of the current stock market crises?
I'd say the solar crisis is still at such an early stage that throwing out the baby with the bath water makes sense. I wish I'd sold Yingli Green Energy while the crisis was still unfolding; I made the mistake of thinking that the Chinese government would boost demand for solar cells enough to keep Chinese companies reasonably safe from the global crisis. It didn't happen that way. Even though Chinese manufacturers such as Yingli are the likely winners in the crisis, I think the crisis is still getting worse and the turn is very far away. The crisis is so deep that the sector isn't likely to see a rally. A spike like that of Feb. 9 might be the best investors can expect. I'd sell on the next one of these and wait for the crisis to age.
The crisis among U.S. natural gas producers is not quite as grim and is somewhat more advanced. I'd still avoid the natural gas producers; they are simply too risky. This year is likely to see even more turmoil in the sector because companies haven't been able to protect themselves against low prices with hedges in the way that they did in 2011. But the crisis is far enough along so that I think 2012 will bring gains to some of the oil-service stocks as North American drilling activity gradually revives. Activity is shifting to North American oil drilling: In the short term, that hurts service-company profits. But once the transition is further along, say, midyear, North American revenue should revive. Schlumberger (SLB) would be my pick as the stock that should lead the rebound with riskier oil-service company stocks to follow.
As for the eurozone debt crisis, I think it remains a trading crisis in which you should focus on a few of the strongest but most volatile stocks. I think those babies are worth playing with in rallies, but don't get too attached.
At the time of publication, Jim Jubak did not own or control shares of company mentioned in this column in his personal portfolio. The mutual fund he manages,Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this column. The fund did own shares of Banco Santander, Schlumberger, Svenska Handelsbanken, U.S. Bancorp and Yingli Green Energy as of the end of December. Find full list of the stocks in the fund as of the end of December here.
Jim Jubak's column has run on MSN Money since 1997. He is the author of the book "The Jubak Picks," based on his market-beating Jubak's Picks portfolio; the writer of the Jubak's Picks blog; and the senior markets editor at MoneyShow.com. Get a free 60-day trial subscription to JAM, his premium investment letter, by using this code: MSN60 when you register at the Jubak Asset Management website.
Click here to find Jubak's most recent articles, blog posts and stock picks.
More from MoneyShow.com:
VIDEO ON MSN MONEY
All of the rules appear to be based upon hindsight. Usually the market has passed you by while waiting for hindsight to occur. The best rule was the bigger the fall, the faster the climb. It is a good rule. All's that you have to do is look at the slope of the price curve for the last 10 days to see when that occurs. If the company is not still swimming upstream, an easier profit can be attained. Bank of America with Merrill Lynch have just reported some very good profits. The time to sell is close, though I would not recommend a short sale just yet. The other stock examples I think fall into the category of a day late and a dollar short. In other words, If you don't already own them, don't buy them.
best way to survive is 'dont have your money invested in something the maggot banksters can get at it'
I bought and sold Banko for good. Europe is on it's way down. Greece is not bottom yet but close. Like Greece, Span Italy and the rest will be in the hole for at least 20 to 30 years.
No finacials for me! I only listen to my own gut and done better then the so called experts. I handle my own money/porfolio!
yes, I do understand that Banco Santander was suffered from the various crises swirling around it. But my question is do you think Santander is basically sound and will it survive, say, the next 5 years.
Speaking of babies, just because a child is passing through it's "terrible twos" doesn't mean that it won't turn out to be somebody of which you would be proud.
I did really well during the Bush years in Business and did really well during the Obama years with non Business items like Real estate credits, clunkers, and Gold.
My workers did well in my Business during the Bush years. My workers can not pay their bills and are doing horrible during the Obama years. Why?
Business is not as important now so they are not as important. What is important is paper work, making money off of regulations, buying gold, buying real estate from slobs. Generally using Capital for garbage than productive items. Incentive provided by the soak the Rich crowd. What is really funny is my workers voted for Obama.
See you Monday. (Incidentally during the Bush years I worked Friday. Everyone profited. Now I take Friday off. Why pay higher taxes (Local taxes up). I would rather take leisure.)
Now, even the Fed, having folded fuel and food back into the mix and looking at 4% inflation, realize that they can't continue to print money and throw it at the economy..
The only way to have a stable and growing market is to have a stable and growing economy.
That is not possible, when the quasi socialists are running the world.
I have always done well in the market, by following that one rule.
April of 2008, I cashed everything out and bought gold, there it stays until Obama implodes the economy, with his removing profits to pay for his vote buying handout programs and green fantasies.
if you buy old, take physical possession and bury it in your back yard..
Almost certainly, if he is reelected, he will try to make private ownership of gold, illegal, a la Roosevelt, because if it is all in gold, he can't touch it and he has to be able to tax, to fund his handout programs.
Should the country be stricken by temporary insanity and reelect him, more and more money will flow into gold, as he will be able to drop the mask of being anything but a socialist.
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
[BRIEFING.COM] The stock market remains on the defensive, unable so far to draw renewed buying interest like it did yesterday. A few key differences are that the financial sector (-0.6%) and the energy (-1.1%) sector are underperforming the market today.
Weakness in those heavily-weighted areas has acted as a weight on the broader market, yet it's worth noting that every sector is currently trading lower at the moment.
Another item catching some added attention and ... More
More Market News
|There’s a problem getting this information right now. Please try again later.|
MUST-SEE ON MSN
- Video: Easy DIY smoked meats at home
A charcuterie master shares his process for cold-smoking meat at home.
- Jetpacks about to go mainstream
- Weird things covered by home insurance
- Bing: 70 percent of adults report 'digital eye strain'