There's not a lot> of positive spin one can put on owning a portfolio of Japanese stocks just as the country experiences the largest and most violent earthquake in its history. On Sunday, Prime Minister Naoto Kan called it the worst crisis since World War II.
It is a truly horrific human tragedy, with thousands of lives likely lost and millions of people hurt or displaced. There's an utter helplessness to natural disasters. The only slightly comforting realization is that Japan's Western-style society will leave the country with only a fraction of the casualties a less advanced economy might have suffered. In Tokyo, multi-million-dollar skyscrapers sway when an earthquake hits. In Pakistan, shanty houses collapse outright.
Of course, there's more than $100 billion in economic losses estimated, as well, a reality already felt by investors who saw Japanese stocks drop on Friday. The Nikkei 225 Stock Average, closely tracked by funds like iShares S&P/TOPIX 150 Index (ITF),
Yet just a few weeks ago the Nikkei 225 was at a 10-month high, up nearly 7% for the year, better than the Standard & Poor's 500-stock index. That gain has now evaporated, and investor concerns over the immediate disaster have been compounded by fears about potential nuclear meltdowns in damaged power plants.
However, as horrifying as the headlines may be, the destruction alone isn't a reason to run from winning trades.
As the quake aptly demonstrates, some events simply can't be anticipated. But, when it comes to our investments, the markets move in trends that tend to persist over time.
For example, many people remember when the Dow Jones Industrial Average dropped 20% on Black Monday in 1987. What they forget is that the year actually ended with a gain in the market.
In Japan, stocks have dropped, but they haven't collapsed completely most Japanese indexes are now trading at levels seen last November. Although the situation is fluid and extremely serious, even $200 billion in lost economic activity could be very easily absorbed by a $5.3 trillion economy, still the third largest in the world.
Researchers at Bespoke Investment have pointed out how, although the Nikkei dropped 25% within six months following the 1995 Kobe Earthquake, Japanese stocks went on to recoup all of those loses and end higher for the year.
Yet when a disaster is the lead story and markets plummet, it's hard to see beyond that morning's headlines.
For example, just as the quake now dominates the news, it was the swine flu pandemic that the public feared back in 2009. For all of the relentlessly fearful coverage, assets like livestock recently soared to all-time highs.
Chile's shockingly devastating 2010 earthquake, which registered 8.8 on the Richter scale, left hundreds dead and tens of billions of dollars in damage. Yet securities like iShares MSCI Chile (ECH)
The point is that, as horrible as the news is out of Japan right now, this too shall pass. And while I won't add be adding to my Japanese holdings on the post-earthquake drive, I'm not dumping them wholesale either. Rather, I'll start by pruning small positions or those in which the loss exceeds 15%, trying to maintain those long-held winners which, not too long ago, were nipping multi-month peaks.
Right now, the news is terrifying. But given the scope of the disaster, Japanese stock indexes have showed surprising mettle. The fact is that the quake's destruction will be contained; it will be tallied, and history suggests, it will be absorbed by the market sooner than we'd probably expect.
I'm sick with grief for the people of Japan and encourage you to join me in supporting one of the many excellent charities providing relief services to victims of the quake. But for investment purposes, a sustained break below 9000 on the Nikkei 225 would frighten me even more than the horrific images of washed away towns.
Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC. At the time of writing, Hoenig's fund held positions in many of the securities mentioned.