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When tragedy strikes
An air crash, an oil spill, a natural disaster, perhaps lives are lost, and so investors face tough, often emotional, decisions. There’s the ethical question for those thinking they can make money out of the situation, but there’s always the need for a risk strategy, for when tragedy strikes. In the case of flight MH370 the terrible uncertainty lingers as the search for answers continues.
Serge Berger has been analysing how to handle stocks during a tragic event, primarily he advises his clients to stay away from companies reeling from an accident or disaster.
"Whether the tragic event is a major oil spill, such as BP's 2010 Gulf of Mexico calamity, a plane crash or a natural disaster, like a hurricane, each of them come with an extreme amount of uncertainty for the companies involved and their stock prices. And because of the human tragedy that is often involved, investor emotions run even higher. Through the lens of a trader, this can quickly lead to dramatic volatility in the stocks and, in retrospect, often end with irrational moves to the downside."
Serge Berger has been looking at market reactions in cases where the reputations of companies are severely damaged. For example, BP faced a huge blow to its profile after a major oil spill in April 2010. Investors trying to buy the dip came off badly according to Serge Berger, because, as he says, they tried to "catch the falling knife". BP's shares fell further in the coming months before slowly recovering.
Looking back, Serge Berger says the BP case offers a clear illustration of the dangers of trying to make a quick trade out of a tragedy.
"Today, the stock is still nowhere near fully recovered, but if one had measured investor sentiment with the temperature of the news flow and overlaid the technical happenings on the chart with this, patience in the end would have paid off and a bounce at the very least could have been played."
02:35 minutes
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