aflacPoor Aflac got it on the chin today: down almost 37 %. Apparently the big financial troubles in little England cause anxiety as they relate to Aflac’s holdings of hybrid securities. I can’t say much about the company or it’s troubles, as I have never really looked at it in detail.

But I can say something in general about stocks that are (or should I say were) spared the worst of a general bear market. There are always stocks that hold up much better than their competitors due to perceived differences in management or product quality or whatnot. In this bear, two in particular had caught my eye: Aflac and Wells Fargo.

Over the past few months I’ve looked at the insurance sector more than once. One company always stood out: Aflac. While all their competition was getting crushed and was generally selling at less than Book Value, Aflac was still trading at 2-4 times of that. Same goes for Wells Fargo in the banking sector. For whatever reason they were still trading at two times Book Value until very recently, even though pretty much every competitor was already well below that, even the better ones such as JP Morgan.

It doesn’t really matter why the market perceived these two companies to be superior. While Aflac may really be better than the everyone else (I just don’t know), it’s completely beyond me why Wells Fargo held up as well as it did, especially after acquiring Wachovia last year.

Usually what happens, especially towards the end of a bear market, is that all the “survivors” will also be beat up. Mostly it’s some analyst who wants to make a name for himself and homes in on whoever is not on the ropes yet. At this point in the business cycle emotions are so fragile that people don’t even care questioning what they read anymore, they just sell. And even more so when it comes to the one or two holdings in their portfolios that have held up well so far. “Of course”, they’ll say, “I should have known. Nobody will be spared. I was foolish for thinking this one was different. Quick, let’s get out”.

Lesson: if you happen to own a company that is valued much higher than their competition, seriously consider about buying protection, such as put options. It doesn’t matter how long they’ve survived without being impaired. Markets are not efficient in the short run, especially not when emotions run wild. It only takes a few days and the company is cut in half or more, and you quickly lose all your outperformance. If you don’t like buying expensive protection, consider swapping out your stock for a sector index ETF.