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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.

The bigger picture: the health of the cruise line industry

Looking at the data, it appears that this Italian fiasco hasn’t had a noticeable impact (at least, yet) on people booking cruises. CruiseCompete, a consumer website to get quotes and book trips, publishes a monthly and yearly report called CruiseTrends. It’s compiled by examining over 25,000 monthly quote requests and pricing trends on the firm’s website and partner Cayole.

And when you look at the annual trends, what happened in Italy has stayed in Italy, so far. The cruise index did fall 4.1% to 142 (from a December reading of 148). But looking at the bigger picture, 142 was the same January reading of the index for the same month of the previous year.

It appears consumers are unfazed by the bad news and are continuing to research and book upcoming trips. But when I spoke to the author of this report, CruiseCompete’s Bob Levinstein, his take was much less sanguine. See, the way the cruise industry works is different from other industries. Prices drop aggressively as ships get closer to sale and those bookings can be months — if not years in advance.

So, while January numbers were eh (down 4% while CruiseCompete was expecting up 5-12%), the next few months may show a very drastic downturn in pricing and revenues for the industry. It’s going to take a lot longer than the 30 days CCL says it will take to remove the ship. This particular boat displaces 114,000 tons of water. Right now, it has 60 million pounds of water inside of it.

“There are going to be headwinds out into the foreseeable future,” Levinstein said referring to the effect of the accident. “When Carnival said it was going to take a $60 million write-down on the accident, they said that was because of a drop in passenger bookings for the next 10 months. 10 months? That’s like me saying I’m not going to be an NFL quarterback tomorrow.”

People may decide to abandon cruising and more experienced passengers may wait until prices drop. He believes this is going to be a big deal for the next couple of years and worth keeping an eye on.

What and where people are sailing

By the way, here’s a most popular list of what and where people were sailing in 2011

Most Popular Sailing Month Requested: March 2012
Most Popular Cruise Itinerary Length: 7 days
Most Popular Country Visited on a Luxury Liner: Greece
Most Popular Cruise Region for Contemporary Boats: Caribbean
Most Popular Luxury Cruise Ship: Queen Mary 2

So, what are investors doing?

The news is everywhere these days. When a tragedy like this occurs, it’s immediately broadcast and reported on around the world. It’s in our faces. Because we’re humans, we’re not particularly good at assessing the situation — at least,not so good at doing it rationally. We see bad things happen and we want out of the stock.

This is due to something economists call the availability bias — that we’re held captive to the news and information available to us at any given moment. We struggle being able to look beyond the brick walls of the information environment that surrounds us. So, we panic. Or, we’re too brazen.

I asked the data team at SigFig (where I’m an editorial contributor) and resident analytical genius Chris Lau to run a multiple regression for the cruise data to see if the trading of Wikinvest users correlates to the CruiseCompete data.

We didn’t find any statistical trends. From this data, it’s pretty clear that people don’t associate cruise trips with investing.

cruiseline stocks, trading volume, and bookings data

But that doesn’t mean Wikinvest users didn’t react to the news. As you can see in the chart above, there was a huge spike in selling (shorts) in both CCL and RCL stock. But, like good value investors, we also witnessed an ever stronger spike in buying in the aftermath of the bad news.

To put all this in perspective, from 1/1/10 to 1/15/12, RCL and CCL averaged 2.7 long trades and 2.7 short trades (identical numbers).

The three days after 1/16, RCL and CCL averaged 29.8 long trades and 10.7 short trades. That’s an increase of 1103% for long positions, and 396% for short positions.

Many investors behave like a flag in the wind when news hits, easily swaying to buy or sell in the direction of the news breeze. Take some time to examine the event dispassionately. Read a few news sources you may not be used to reading so that the news doesn’t reverberate in an echo chamber. Most of all, look at the data.

Many times you can do well by doing the opposite of what everyone else is doing with their investments.

*Trading data compiled by examining 1,351 anonymous SigFig users – across multiple brokerages – over a one  year period and was obtained from sources that we believe reliable. This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.  The graphs and charts provided by this website depict general information regarding trading volume based upon SigFig user data, which is not indicative of the markets as a whole. Past performance is never a guarantee of future performance and the charts and graphs on this website are not meant to predict future performance. An investor should not base any investment decisions solely on the information provided by the charts and graphs. Data, graphs and charts are used solely for the purpose of example; this information grows old quickly and no decisions should ever be made based on this information alone.

About Tradestreaming

Tradestreaming is a community of investors learning directly from experts. I’m Zack Miller, investor, entrepreneur, and founder of Tradestreaming.com and I literally wrote the book on how to invest in the age of Facebook and Twitter. Tradestreaming is the resource I’ve created to help me become a better investor.  I believe it will help you … Continue Reading