The recent unfortunate accident involving the Costa Concordia cruise ship, which is owned by a subsidiary of Carnival Corp., raises an important investing question: Should you bail out of a stock if the company is affected by a serious negative event? Unless the event could be part of a series or trend, the answer is usually “no,” for two reasons.

The argument in favor of buying Kodak stock goes something like this: Now that Kodak has filed for bankruptcy, its stock trades for about 30 cents; but since it traded for more than $30 just a few years ago, doesn’t that mean it has to be cheap? Unfortunately, there are two major fallacies with this argument.

One of the things we like to see in a potential turnaround stock is a strong brand name. That will often provide the foundation on which the company can build its turnaround. However, the recent Chapter 11 filing by Hostess Brands and Eastman Kodak are reminders that well known brand names alone may not be enough to save a company. In both of these cases the brand names are widely recognized, but the products with which they are associated no longer represent strong business franchises.

Since last August, the stock market has been dominated by headlines about financial matters in Europe. It has been almost as though the fundamentals of U.S. stocks don’t matter anymore. Things might look great (well, maybe they haven’t ever looked great in recent months, but at least okay) in the U.S. but if Europe didn’t seem to be making any progress on solving its latest crisis (Greece, Ireland, Portugal or wherever) the Dow would fall sharply. Then if good news came from across the Atlantic, the Dow would soar.

After a long dry spell with few significant bankruptcies, we’ve seen four large public companies file for Chapter 11 protection in the last three weeks: MF Global Holdings (total assets of $40.5 billion) on October 31, Syms (assets of $271 million) on November 2, Dynegy Holdings (assets of $9.9 billion) on November 7 and General Maritime (assets of $1.8 billion) on November 17. Taken together, these four filings represent more assets going into Chapter 11 than all of the other bankruptcies over the preceding 19+ months combined.

There’s a lot to worry about right now out there in the financial world. The European debt problems, the volatility in the stock market and the gridlock in Washington are probably at the top of many worry lists.

This question is a little too philosophical for us to tackle. But it was prompted by a weird coincidence that we do want to examine.

There is an old investors’ maxim that goes something like “The stock market has forecast ten of the last five recessions.” We don’t know if the U.S. economy is going into (or already in) another recession....

We do not claim any expertise in economic forecasting--and those who do claim such expertise usually get it wrong--but that doesn’t stop us from having some views on the economy.

The lead article in the August issue examines the lessons we have learned over our 25 years of writing about turnaround investing. While many of the lessons are focused on turnarounds or bankruptcies, there are four principles that we believe are essential to successful investing--of any style.

The recent unfortunate accident involving the Costa Concordia cruise ship, which is owned by a subsidiary of Carnival Corp., raises an important investing question: Should you bail out of a stock if the company is affected by a serious negative event? Unless the event could be part of a series or trend, the answer is usually “no,” for two reasons.

The argument in favor of buying Kodak stock goes something like this: Now that Kodak has filed for bankruptcy, its stock trades for about 30 cents; but since it traded for more than $30 just a few years ago, doesn’t that mean it has to be cheap? Unfortunately, there are two major fallacies with this argument.

One of the things we like to see in a potential turnaround stock is a strong brand name. That will often provide the foundation on which the company can build its turnaround. However, the recent Chapter 11 filing by Hostess Brands and Eastman Kodak are reminders that well known brand names alone may not be enough to save a company. In both of these cases the brand names are widely recognized, but the products with which they are associated no longer represent strong business franchises.

I never recommend getting out of the stock market entirely--or even making major changes to your allocation to stocks. The stock market is so unpredictable that if you bail out, the risk is very high that you will miss a significant upturn. Moreover, even if you make the right call to get out of the market, you then have to muster the courage to get back in. 

There are certainly good opportunities in foreign turnarounds, but also very significant risks as well. The market inefficiencies that provide unusually high return potential for turnarounds here in the U.S. are probably even greater in foreign markets. However, there may be special, local features that affect foreign companies that we may not understand when we view them from afar. 

The structural factors relating to bankruptcy securities can be both legal and psychological. As an example of a legal factor, many institutional investors (such as insurance companies or mutual funds) are not allowed, either by law or by their charter, to hold bonds that have defaulted and no longer pay interest.