Lessons from a Nuclear Meltdown


Back in January I started to be worried about inflation.  Seeing that gold was already very high, I started to look for other things I could buy that would provide an inflation hedge.  That was when I discovered the Canadian Uranium producer, Cameco (CCJ):

http://finance.yahoo.com/q/bc?s=CCJ&t=2y&l=on&z=l&q=l&c=

Cameco seemed like a good buy as an inflation hedge because if there is inflation, uranium would go up in price along with all other materials.  There was also somewhat of a currency hedge since it was a Canadian company.   This meant that if the dollar started to be devalued, earnings in dollar terms would rise (because one would need to trade more US dollars for Canadian dollars, so earnings in dollar terms would rise even if earnings in Canadian dollars remained the same).  Finally, with all of the talk about carbon credits and what seemed like a renewed interest in nuclear energy in an effort to reduce import of oil and the burning of coal, holding stock in the world’s largest uranium producer seemed like a good bet.

I bought some shares at around $30.  The price sank to $20.  I reviewed the stock to see if there was anything I had missed when making my original purchase.  Deciding that there wasn’t, I bought more shares at $20.  Over the next year the price rocketed up to almost $45 per share.  This was a 50% gain from my original buy-in point, and almost double my second buy-in.

Then on Friday, the earthquake hit Japan, causing power to be lost to the cooling pumps for their nuclear reactors.  Three of the nuclear reactors to started to overheat, forcing the utility to flood the reactors with sea water, destroying them entirely.  this meant there will be fewer reactors using uranium in the near future.  Even worse for uranium producers, the release of radiation from this event has caused nuclear power detractors to crawl out of the woodwork and call for a moratorium on new nuclear plants.  Yesterday CCJ fell over 12%, down to $32 and change per share. 

Given this misfortune and drop in share price, what am I planning to do?  Well, many would call their broker immediately and sell the stock, saying “Get whatever you can for them. Just dump them!” (to quote the movie Wall Street).  The trouble is, the news is already out there and the damage has already been done.  If I were to sell now, I would be getting the worst prices possible.  After all, who would want to buy uranium stocks when it looks like nuclear power may be set back by 20 years?

Instead, I’m planning to give time for the dust to settle.  I’m not yet ready to jump in with both feet and buy some more shares, but I’m also not planning to rush out and sell shares.  If it looks like the demand for uranium is really going to be slow for a long period of time, I’ll quietly sell the shares and take either a small profit or a slight loss.  If it looks like things aren’t as bad as they seem, however (which they often aren’t), I may take the opportunity to snatch up a few extra shares while they are on sale. 

Always remember that there is no reason to accept the prices that the market is offering.  There is no reason to sell just because share prices drop.  Likewise, there is no rush to buy just because share prices go up.  Also remember that after the news breaks, most of the effect on your share prices will already be felt, so there is no reason to rush out and sell.  There is nothing wrong with just turning off CNBC and switching on some old reruns of Cheers.

Comments appreciated! What are your thoughts? Questions?

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