Investing Lessons From Mitt Romney and the Italian Cruise Ship Tragedy

January 20, 2012

Within the last 24 hours, I watched a presidential debate and saw endless news footage of an Italian cruise ship sinking.  As a guy who lived on a boat for a few years, I couldn’t help but read everything I could find about the cruise ship, the captain, and the circumstances surrounding this tragedy.   As a political geek, I couldn’t help but watch yet another debate with an ever narrowing field of candidates.  My only regret this political season is that there are only debates for the Republicans.  During the last election cycle we had them for both parties, and for me that was a wonderful thing.  But, that’s not what I ‘m writing about today.

During the debate, the subject of Mitt Romney’s private sector experience was a hot topic.  I’m not here to judge or to influence votes, so I’m going to focus on only one thing.  The critics of Romney’s time at Bain Capital have called his time at the venture capital firm a “vulture capital” experience.  For those who aren’t familiar with those terms, venture capital firms invest in small businesses, help the businesses grow, and then sell the company or profit from the increase in the company’s stock price.  Because these are often small businesses or businesses that are in need of a turnaround, the failure rate of these businesses can be high.  Romney states that his experience was mostly in the area of helping with turnarounds, taking businesses that are struggling and investing when the outlook is bleak.  In a perfect world, the turnaround is successful and the company, the VC firm, and the employees are all winners.  Sadly, the world isn’t perfect.

How are the cruise ship tragedy and Romney’s critics related?   On the first day of trading after the cruise ship sank, the cruise line’s stock price declined significantly. It would seem to make sense that people would want to sell the stock after such a disaster.

But for every seller, there was a buyer. Were people who were buying the stock vultures?  Were they contrarians?  Were they bottom feeders or opportunists? Whatever you want to call them, they were following a time-tested strategy of buying companies while they were down in hopes of profiting from a turnaround.

OK, that’s nice, but what is in this for me?  Or you? If you understand that markets move up and markets move down and we almost never have a warning to tell us which way it’s going, this can help you as a long term investor.  Here’s how.  When you build your portfolio, especially in your 401(k), which for many people is their largest investment by far, build it so that it’s diversified.  Own stocks.  Own bonds.  Own cash.  Own alternative asset classes if they’re available.  Own a little bit of everything, in varying amounts based on your risk tolerance, and rebalance your account at least annually.  If your plan offers an automatic rebalance, and many are today, enroll in it!

Rebalancing helps you buy investments at a relatively low price (without your critics calling you a vulture) and sell them at a relatively high price (to maximize your profits without being called greedy).  It puts in place a system to help you grow your wealth over time and not take on too much investment risk.  We can learn from investors’ behavior during tragedies and from watching our political process at work, and with a few tweaks to our investment behavior, we can benefit without getting called names.