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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 first reason is that, unless you are a professional investor with a serious trading platform, you won’t be able to get out early enough to protect yourself. By the time you hear the news and place a sell order, all of the professional stock jockeys with hair triggers will have already driven the stock price down—which leads to the second reason.
The second reason is that the market usually over-reacts to bad news. For example, Carnival’s stock lost $4.7 billion in value immediately after the Costa Concordia accident. It seems highly unlikely that the accident will cost the company anywhere near that much. The ship was reportedly worth about $500 million, and it is almost certainly fully insured. Sure, there will be lawsuits, but the damages will likely be in the hundreds of millions, not billions—and they are probably covered by insurance too. While some number of potential cruise-goers will now choose some other type of vacation, Carnival is not likely to lose $4.7 billion worth of future business. In fact, we think the market’s over-reaction makes Carnival’s stock look like a good buy now.