The cruiseline tragedy and the unexpected lesson for investors

There’s an old adage in the investment field. It’s become almost folk knowledge that you’re supposed to buy on the rumor and sell on the news.

Simply, that means that the investment gains are made before news breaks. Once the news — good or bad — makes its way into the media, most of the gains/losses have already happened.

But sometimes, when disaster strikes, there isn’t really a rumor. News hits and stocks get pummeled. Right away.

That’s what happened to the two leading cruise line stocks in the wake of the Italian disaster January 16th. Carnival Corporation (CCL), the owner of the ship, saw its stock drop like a rock, at one point losing over 20% of their value. Competitor, Royal Caribbean Cruises (RCL), was also hit out of sympathy, losing as much as 8% on the day the news hit. Investors were very quick to sell, skittishly unloading their holdings before the true extent of the accident was known.

And in fact, both stocks have regained some of their initial losses.

Talking about the investment side of this tragedy is in no way meant to disrespect the innocent victims of the tragedy. Their pain is more important than these more worldly discussions. Our hearts go out to them. But, it’s also instructive to see how investors behave in the wake of news, so we can learn from it. And learn from our mistakes.

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