Russia: Taking Emotions Out Of Trading

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I am generally a big believer that well-publicized dangers to stability, particularly of the international variety should, from a trader’s perspective, always be regarded as a storm in a teacup. It is not that they always are, but that hype takes over and markets generally price in the absolute worst case scenario. In reality that worst case rarely unfolds. As a strategy, therefore, it works because the wins make up for the occasional possibility of loss. It also has the added advantage of enabling even the most cynical of profiteers to cloak themselves in a more socially acceptable guise... the eternal optimist.

Y2K, riots in Greece and the Euro crisis, North Korean saber-rattling; the list goes on but, looking back, each one was an opportunity to buy stuff REALLY cheap while impressing on your fellow man what a “glass half full” kind of a person you are. The logic of seeing things this way is undeniable, but, up until now, I have been unable to see the situation in Ukraine from the same perspective, no matter how hard I try.

I have several good friends of Ukrainian descent and I cannot help but feel that profiting off of what their country is going through would be inherently wrong, but on the other hand the same could be said of Russia, where I have lived and worked. That experience leads me to my second reason for a reluctance to follow the logical path and recommend those heavily discounted Russian stocks; I am worried.

In these days of NATO dominance, geopolitical events tend to be about brinkmanship, but even the most delusional of leaders has to finally accept that going over the brink will result in the destruction or desolation of their country and them being tried for war crimes at some point in the future. Backing down in the face of international condemnation is the only option. Russia, however, is different.

In my experience the people are fiercely patriotic and are all too aware that their country has triumphed when faced with similar insurmountable odds in the past. They relish the prospect of fighting as an underdog. Couple that with an autocratic leader who feels threatened by domestic criticism and you have a recipe for disaster.

These are all good reasons to stay away from Russian stocks, except for one thing. They are all reasons based on feelings and emotion. I feel that it wouldn’t be right to invest in Russia, I fear that Putin will act as some crazy martyr rather than as a rational being with self-interest at heart. You may look at it the same way, but as I have said many times before and will no doubt say many times more: feelings and emotions are terrible reasons to trade.

Logical reasons to stay out of Russia exist too, but they can be countered or discounted. The flight of foreign capital from Russia has been huge, but how much is left to pull out? Haven’t we seen (and priced in) the worst? Threats to Europe’s supply of natural gas has sharpened the intent to export that commodity from the US, a development that could do long term damage to Russia’s biggest industry, but if we could minimize our exposure to energy we could mitigate that risk somewhat.

All in all, it is time to put emotion aside and look for a simple, low energy exposure investment in Russian stocks. Despite my feelings telling me that this is far from over, logic tells me that it is not going to end as badly as the market is assuming. An average P/E of 6 for the most well known Russian stock ETF, the Market Vectors Russia ETF (RSX), is assuming the worst.

RSX, though, has one major disadvantage as a tool to play the possibility of Russian recovery; it’s over 40% weighted towards energy. The U.S. will be exporting Liquid Natural Gas (LNG) in large quantities before too long and European buyers, spooked by this latest display of instability, could be eager customers. Even if some degree of normality returns to Russia, the depressing effects on the energy sector of destroying customers’ confidence in Russian gas will live on a long time.

A better option may be the same firm’s Russia small Cap ETF (RSXJ). At first glance, adding the risk and volatility of small cap stocks to the risk that any investment in Russia currently represents sounds suicidal. The fact is, though, that if things do melt down the results will be the same whatever you are invested in. RSXJ’s 12.5% exposure to Russia’s energy sector, however, gives a more pure play on a relief rally should calmer heads prevail, without the possible lingering effects on the country’s largest export.

Going against emotions and intuition is tough. If our feelings are right, then any potential loss becomes about more than money. If we are not careful, we feel bad about ourselves for not listening to our illogical side. I know this and am prepared for it in this case, but that is a risk worth taking. Russian stocks are priced as if Putin will act without regard for his or his country’s best interests and as if a total meltdown in a fast growing economy is inevitable and will last. History shows us that these are all unlikely outcomes and, given the choice between believing my emotions and believing data, I’ll take data every time.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , ETFs , Investing Ideas
Referenced Symbols: RSX , RSXJ

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Martin Tillier

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