Don’t be ashamed to profit from Japan

March 17, 2011, 8:51 PM UTC

The first rule of investing is to avoid letting emotions influence your decisions. So buy Japan, and don’t feel bad when you make a tidy sum.

Speaking about the earthquake in Japan on CNBC last Friday, anchor Larry Kudlow put his foot quite deeply into his mouth. “The human toll here looks to be much worse than the economic toll and we can be grateful for that,” he said. He was quickly skewered for what was seen as a profound lack of compassion, despite the fact that the next words out of his mouth were, “and the human toll is a tragedy, we know that.”

This being the age of the angry mob on Twitter, he was soon forced to issue an apology. And while he should have known better than provide an opportunity for obsequious and self-righteous compassion, his remark did point to a fundamental truth of investing. That is, the best investors don’t let emotions — positive or negative — color their decision to buy, sell, or hold. To the point: with the Nikkei in free fall after the devastating earthquake — notwithstanding the one-day bounce of nearly 6% this week — is it time for savvy investors to step in and buy?

Barton Biggs, the long-time Morgan Stanley strategist turned hedge fund investor, said late Tuesday that he thought the panic selling that sent the Nikkei down 16% was “a gross overreaction” and that it was time to try and catch that falling knife.

David Zervos, head of global fixed income strategy at Jefferies, wrote of a similar sentiment in a note to investors. “I do not believe that there are many Japanese policy makers (or market participants) who believe the ‘long term’ prospects for Japan are so dim that we should be at equity valuations which are only a few percentage points from the levels reached in mid 2003 or early 2009,” he said. Translation: it’s time to buy something.

You’d hate to be the guy who was warming up to Japanese stocks in the weeks or months before this earthquake. I’d noticed several instances of optimism about Japanese stocks in missives from institutional analysts as recently as late February. But if the arguments made sense to you then — that we’d reached the so-called moment of maximum pessimism about the Japanese economy — and you’re willing to take the bet that the fallout, both nuclear and otherwise, from recent events isn’t going to be as severe as many appear to believe, then now is an even better time to buy.

(Think of BP (BP) stock right after the spill — best buying opportunity in a decade. And don’t give me any guff about supporting BP by buying its shares. Secondary market buying is about tactics, not support or lack thereof for a company or industry. If you don’t get that, hang up your investing spurs, settle into your rocking chair, and watch the show.)

There might even be a silver lining to this whole mess. In Thursday’s New York Times, Hiroki Azuma, a Japanese professor, writes of a burgeoning national pride in Japan’s ability to deal with this greatest of disasters. Might the country emerge from it more confident than it has been in recent decades?

Still, it’s a tough call to make, isn’t it? But predicting the future always has been. A recent on-the-one-hand, but on-the-other column by my old buddy, CNNMoney’s Paul La Monica, showed that precisely: institutional investors can’t reach consensus about what to do next. But that’s the point, isn’t it? It’s pretty hard to make money when everyone agrees on something.

Who knows what will happen with the unfolding nuclear disaster? Or whether Japan’s economy really can bounce back from yet another punch in the gut. But it’s at sharp turns in the market where the real money is made or lost. Me? I’m in.

Also on