LESSONS FROM MR. MARKET’S MOODSWINGS

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

After the shortest and sharpest drop in four years, global markets bounced strongly yesterday. Homes Inns & Hotels (HMIN) jumped 6.91%, Cognizant (CTSH) rose 5.10%, ICICI (IBN) Bank gained 4.17%, the Swedish ETF (EWD) moved up 2.70%, and America Movil (AMX) grew by 2.14%.

As sharp as the past week’s sell-off seems, it’s still a far cry from the correction in May where the MSCI Emerging Markets Index (EMM — chart) dropped more than 26% over a period of five weeks. In comparison, the index dropped only about 8% this time around. Despite the market’s volatility, we’ve maintained our positions in all of our stocks except Unibanco (UBB), which hit our sell stop on March 5. As you know, Global Stock Investor focuses on "buy and hold" investments, so I’ve tried to set the stops on our picks wide enough to survive the occasional hiccups like the ones this past week.

Here are three lessons from this past week.

First, market corrections can come suddenly and from nowhere — and for no good reason. Here’s a rule of thumb, based on my experience of having lived (and invested) through dozens of these corrections. Unless there is some major event — like a devaluation of a major currency against the backdrop of a financial mania — more often than not, the sell-off is just a correction. It ends up being a buying opportunity in the long run. The financial mania in Chinese domestic markets isn’t enough to bring down global financial markets. The global economy and corporate earnings remain in rude health.

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Second, during times of market panic, selling becomes indiscriminate, without regard to companies’ fundamentals. The baby goes out with the bathwater. Nothing fundamental changed about any of our picks over the past few trading days. It’s all been about Mr. Market’s moodswings.

Third, the riskier the stock, the more volatile the price. Our stocks behaved in line with our risk assessments. High risk Homes Inns (HMIN) was the most volatile, while the Swedish ETF (EWD) sold off the least. How best to handle this? Take smaller positions in riskier stocks. When you do this, the overall volatility of your portfolio can drop by half. You’ll make less money in the long run, but you’ll sleep better at night.

The bottom line? Many of the stocks in our Global Stock Investor portfolio rallied more than 50% after the sell-off in May. It was wise to hold on. Unless we hit our stops, you should, too.

STOCK UPDATE

Expect significant movement in Home Inns (HMIN) today and tomorrow, as it has an earnings conference call scheduled for tonight, starting at 8:00 p.m. EST. Details here. We expect Homes Inns’ results to confirm our bullish stance on the stock.

Also, Indian financial giant ICICI Bank announced that it plans to transfer investments in four subsidiaries to a new wholly owned unit, ICICI Holdings. This includes its investments in ICICI Prudential Life Insurance Co. Ltd., ICICI Lombard General Insurance Co. Ltd., Prudential ICICI Asset Management Co. Ltd. and Prudential ICICI Trust Ltd.

This is great news. ICICI’s listing means that these businesses are growing even faster than they expected and that these subsidiaries need more investment than ICICI alone is able provide. ICICI bank plans an IPO of this subsidiary this coming year but intends to retain its majority ownership in the new company. The ICICI story is going from strength to strength.

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Finally, don’t forget to sign up for my Eagle colleague Mark Skousen’s conference FreedomFest, where I’ll be speaking, as well. Mark’s special "early bird" discount of $100 off is ending next week and he already has had a huge positive response with more than 500 paid attendees signing up. With 77 speakers, including top financial professionals, it’s the "greatest show on earth" in a fun city, Las Vegas, July 5-7. Don’t miss it. Call Tami Holland to sign up today at 866.266.5101.

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Last week's drop of over 4% in the S&P makes it a particularly difficult time for global equity markets.

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