It’s times like these that you will see your Average Joe investor running around like a chicken with its head cut off… and watch the dooms-day reports of the market crashing (for the thousandth time)… and the photo of a trader on Wall Street holding his head as if he lost millions (which he probably did, but not his own money).
Times are crazy
Yesterday the stock market dropped 500+ points. Yes, that’s a lot. The international exchange markets don’t look so peachy either. And to top it off, people are speculating that AIG is going to topple too… so we have a rocky road ahead of us. And certainly if you had money in a Merrill Lynch or Lehman Brothers account, you are probably very upset (to say the least).
CNBC likes to highlight that this was probably the worst loss since 9/11… BUT do NOT hit the panic button. Do NOT sell everything… granted, you may have to if you had stock in those companies (not much choice there) but unless your other stocks lost 95% of their value, I’d hold on to them. Reason: You will be making a mistake.
Fight or Flight
People tend to follow a herd mentality - that is, they follow the trend. They watch CNBC and read the Wall Street Journal, search in chat rooms for stock suggestion tidbits, hoping to make a quick buck.
But that never happens. Markets are efficient. They take into account everything in the news before you can. So by the time you got that tip, so did five million other Shmoes, and they’re all buying the stock (or selling it, pick your fancy).
This herd-mentality also leads us wrong, often when the skies are blue and everyone is making money. Everything appears to be great, nothing can go wrong, right? The market is on the up-and-up and it will continue to do so! So you buy and buy and buy…
But then something goes wrong. The company that has been performing so well suddenly does not meet their earnings for the quarter. The stock gets downgraded… OH NO! So people panic and SELL SELL SELL! Just your luck, you were at work when they made the announcement. So now what? The skies are falling (much like yesterday). You panic like everyone else and SELL!
Nobody blames you. Everyone else was doing it. You just did not do your research. You heard from your cousins friends second wifes niece that it was a good buy - so it had to be right! How could you know the company had unstable off-balance sheet items… or they had some crazy way of accounting for their depreciable assets… or they were avoiding taxes via a shell corporation in the Virgin Islands… who knew?
The End… ?
Just when you think the end is near, you better get ready for another drop. Truth in the matter is, every market is cyclical. They go up, they peak, and they go down… until eventually we come to the light at the end of the proverbial tunnel… and we go up again. Rinse and Repeat. The million (or shall I say billion) dollar question is, where is the bottom?
People thought that the failure of Bear Sterns was the bottom. They thought the market would recover. But nope.
Freddie and Fannie Mae were taken over… now, there’s the end. Nope.
Merrill Lynch and Lehman Brothers… another accident waiting to happen.
And yeah - now investors are getting the point: We’re still in a market shake-out.
Where does she stop? Nobody knows.
Now What?
So what’s the solution? First, put on a clean pair of knickers and chill out.
As someone in their twenties, I would say that it would be a good idea to take advantage of the situation (if you are older, perhaps you need a more conservative investment plan). But do it wisely. Your young and you have time to take a few risks in the market - if you are even willing to invest in it. No, I’m not here to make stock suggestions, but I will tell you that many money gurus made their millions during the recessionary periods (yes, we are in one). Use it as motivation.
How did they do it? They went against the TREND of selling. They did their homework and researched the stocks rather than listening to someone else. They bought stocks at rock-bottom prices, rather than selling them. The key is that the stock should have been worth much more, but the prices were hammered down because the Average Joe hit the panic button and sold at a discount. Thus, when the stock returns to their true value, it amounted to a profit.
Pretty ingenious, right? It’s called a Contrarian investor. Google it.
Heed My Warning:
Before you dive in, hold on a second. Don’t go buying up every stock that got hammered down yesterday. If you have never opened a book about investing, or you know nothing about the stock market… or the company, for that matter… DON’T jump in right now. I know this is a little advanced for some of you, but truly - You won’t know if you are buying a good deal or not.
But I have to write about this because it is a GREAT opportunity for a lot of people who know what to look for. So for those who haven’t caught on already, if you who know how to look for a “value investment,” (Thank You, Benjamin Graham) now may be a great time to do some digging. You just have to be willing to ride out the cycle if this is not the end (yet).
Of course, I know that there will be some of you who decide to take a risk, buy some stock and hope it goes up when the market goes up. And hey, it may work. But don’t sink a lot of money into it. You may regret that. Be smart about it.
Watch from the side-lines. Choose wisely.
If you are not a risk taker, this is NOT for you. Some people are better off (and would be much happier with lower blood pressure) holding bonds or CD’s. Do what you are comfortable with. But don’t break the bank.
It seems like a lot of rules, but really… there are none. The market does what it wants. And previous earnings does not necessarily predicate future profits (as evidenced by several large company failures over the past year). So be smart.
And Good Luck.
~K
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