Panic Buying

What It Is:
Panic buying refers to the purchase of a stock immediately after a sudden, substantial price increase.

How it works/Example:
Investors watching the market may jump to buy a stock immediately after a major move in the stock's price, hoping to take advantage of the surge in the price.

Why it matters:
Investors may buy stock for a number of reasons. Fear of being left out of the next big thing, however, is not the best reason. Panic buying usually is the result of the herd instinct among some investors. While there may be some gains on the residual increase in the price spike, it is often too little, too late.


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Waiting for the Right Pitch

For a value investor a pitch must not only be in the strike zone, it must be in his "sweet spot."  Results will be best when the investor is not pressured to invest prematurely.  There may be times when the investor does not lift the bat from his shoulder, the cheapest security in an overvalued market may still be overvalued.  You wouldn't want to settle for an investment offering a safe 10 percent return if you thought it very likely that another offering an equally safe 15 percent return would soon materialize.

An investment must be purchased at a discount from underlying worth.  This makes it a good absolute value.  Being a good absolute value alone, however, is not sufficient for investors must choose only the best absolute values among those that are currently available.  A stock trading at one-half of the underlying value may be attractive, but another trading at one-fourth of its worth is the better bargain.  This dual discipline compounds the difficulty of the investment task for value investors compared with most others.

Value investors continually compare potential new investments with their current holdings in order to ensure that they own only the most undervalued opportunities available.  Investors should never be afraid to reexamine current holdings as new opportunities appear, even if that means realizing losses on the sale of current holdings.  In other words, no investment should be considered sacred when a better one comes along.

Sometimes dozens of good pitches are thrown consecutively to a value investor. In panicky markets, for example, the number of undervalued securities increases and the degree of undervaluation also grows. In buoyant markets, by contrast, both the number of undervalued securities and their degree of undervaluation declines. When attractive opportunities are plentiful, value investors are able to sift carefully through all the bargains for the ones they find most attractive. When attractive opportunities are scarce, however, investors mus t exhibit great self-discipline in order to maintain the integrity of the valuation process and limit the price paid. Above all, investors must always avoid swinging at bad pitches.

The adage is that if you are going to panic, it's best to panic early. When did you last review your investments?

Investments

The stock market's ups and downs have spooked investors. One survey said that the majority of investors hadn't changed their allocations – 72pc had kept their UK investments as they were, while 88pc had left their eurozone allocation untouched.

"Some people seem to be caught in the headlights, "unsure what to do as financial losses bear down on them, said Nicholas Boys Smith of Lloyds TSB International Wealth, which carried out the survey. Experts say avoid making knee-jerk reactions. The adage is that if you are going to panic, it's best to panic early.

But if you can't remember the last time you reviewed your investments, or your financial adviser hasn't been forthcoming, now is the time to give your portfolio an overhaul.

Tip: The bestselling multi-manager team at Jupiter expect markets to be resilient. Not surprisingly, their portfolios are light on European equities. They remain overweight in funds such as Invesco Perpetual Income, Newton Asian Income and First State Asia Pacific.

Algy Smith-Maxwell of Jupiter said: "My advice is to invest in high quality businesses that have a proven track record of paying healthy dividends. A dependable income stream should keep a cautious investor patient while the financial system undergoes a painful period of structural reform."

http://www.telegraph.co.uk/finance/personalfinance/investing/8932939/Eurozone-crisis-surviving-the-second-credit-crunch.html

Why don't smart investors, seeing others panic and sell stocks, step in to buy them up at a bargain?

First, it's very hard, in the midst of a crisis, to tell whether markets are acting rationally or irrationally. Buyers refused to enter credit markets this summer on fears about risky mortgage debt. It will take months, maybe years, to add up the full impact of losses on subprime loans.

It's also tough to think rationally yourself. "It's hard to keep your emotions in check when your money is on the line," Shefrin says.

And, even if you're confident the panicked market is giving you a buying opportunity, you're likely to want to wait until it hits bottom. If a market is in free fall, buying stocks on the way down is likely to give you instant losses.

Not only will buyers hold back. A falling market will bring many more sellers out of the woodwork. Leverage is one reason: Many investors buy stocks on borrowed money, so they can't afford to lose as much without facing bankruptcy.

This is one explanation for the temporary, sharp drops in many financial markets in the summer of 2007. Losses on leveraged mortgage debt prompted many hedge funds to dump all sorts of assets to raise cash.


Comment:  Only a few transactions occur at the lowest price.  It is not realistic to buy at the lowest price but one should start buying when the price is already low by your valuation.


Also read:  

Strategy during crisis investment: Revisiting the recent 2008 bear market

Lessons from the '87 Crash

SPECIAL REPORT October 11, 2007

Lessons from the '87 Crash

Enjoying the Dow's record run? Don't get too comfy. The market's Black Monday breakdown is a reminder of how quickly investor sentiment can turn

by Ben Steverman

As major stock indexes hit all-time highs, it's worth looking back 20 years to a far gloomier time, when investors were cruelly and suddenly reminded that the value of their investments can depend on something as unpredictable as a mood swing.

Every once in a while, fear, snowballing into panic, sweeps financial markets—the stock market crash of October, 1987, now celebrating its 20th birthday, is a prime example.

In the five trading sessions from Oct. 13 to Oct. 19, 1987, the Dow Jones industrial average lost a third of its value and about $1 trillion of U.S. stock market value was wiped out. The losses culminated in a panic-stricken 22.6% decline in the Dow on Black Monday, Oct. 19. The traumatic drop raised recession fears and had some preparing for another Great Depression.

Stock market crashes were nothing new in 1987, but previous financial crises—in 1929, for example—often reflected fundamental problems in the U.S. economy.

MYSTERIOUS MELTDOWN
The market's nervous breakdown in 1987 is much harder to explain. Especially in light of what came next: After a couple months of gyrations, the markets started bouncing back. The broad Standard & Poor's 500-stock index ended 1987 with a modest 2.59% gain. And in less than two years, stocks had returned to their pre-crash, summer of 1987 heights.

More importantly for most Americans, the U.S. economy kept humming along. Corporate profits barely flinched.

To this day, no one really knows for sure why the markets chose Oct. 19 to crash. Finance Professor Paolo Pasquariello of the University of Michigan's Ross School of Business says the mystery behind 1987 prompted scholars to come up with new ways of studying financial crises. Instead of just focusing on economic fundamentals, they put more attention on the "market microstructure," the ways people trade and the process by which the market forms asset prices.

True, in hindsight there are plenty of adequate reasons for the '87 crash. Stocks had soared through much of 1987, hitting perhaps unsustainable levels: In historical terms, stock prices were way ahead of corporate profits. New trading technology and unproven investing strategies put strain on the market. There were worries about the economic impact of tensions in the Persian Gulf and bills being considered in Congress.

OUT OF SORTS
But for whatever reason, the mood on Wall Street shifted suddenly, and everyone tried to sell stocks at once. "Something just clicked," says Chris Lamoureux, finance professor at the University of Arizona. "It would be like a whole crowded theater trying to get out of one exit door."

It's a fairly common phenomenon on financial markets. Every stock transaction needs a buyer or a seller. When news or a mood shift causes a shortage of either buyers or sellers in the market, stock prices can surge or plunge quickly. Most of the time, balance is quickly restored. Lower prices draw in new buyers looking for a bargain, for example.

Sometimes, as in 1987 and many other true crises, things get out of hand. What happens at these moments is a mystery that may be best explained by dynamics deep within human nature.

Usually, explains behavioral finance expert Hersh Shefrin, a professor at Santa Clara University, investors believe they understand the world. In a crisis, "something dramatically different happens and we lose our confidence," Shefrin says. "Panic is basically a loss of self-control. Fear takes over."

BUYERS AND SELLERS
Why don't smart investors, seeing others panic and sell stocks, step in to buy them up at a bargain?

First, it's very hard, in the midst of a crisis, to tell whether markets are acting rationally or irrationally. Buyers refused to enter credit markets this summer on fears about risky mortgage debt. It will take months, maybe years, to add up the full impact of losses on subprime loans.

It's also tough to think rationally yourself. "It's hard to keep your emotions in check when your money is on the line," Shefrin says.

And, even if you're confident the panicked market is giving you a buying opportunity, you're likely to want to wait until it hits bottom. If a market is in free fall, buying stocks on the way down is likely to give you instant losses.

Not only will buyers hold back. A falling market will bring many more sellers out of the woodwork. Leverage is one reason: Many investors buy stocks on borrowed money, so they can't afford to lose as much without facing bankruptcy.

This is one explanation for the temporary, sharp drops in many financial markets in the summer of 2007. Losses on leveraged mortgage debt prompted many hedge funds to dump all sorts of assets to raise cash.

THERAPY FOR A PANICKED MARKET
The solution to a panicked market, many say, is slowing down the herd of frightened investors all running in the same direction. New stock market rules instituted since 1987 pause trading after big losses. For example, U.S. securities markets institute trading halts when stock losses reach 10% in any trading session. "If you give people enough time, maybe they will figure out nothing fundamental is going on," University of Michigan's Pasquariello says.

There's another form of therapy for overly emotional markets: information. In 1929 and during other early financial crises, there were no computer systems, economic data were scarce, and corporate financial reporting was suspect. "The only thing people knew in the 1920s was there was a panic and everybody was selling," says Reena Aggarwal, finance professor at Georgetown University. "There was far less information available." In 1987, and even more today, investors had places to get more solid data on the market and the economy, giving them more courage not to follow the herd. That's one reason markets found it so easy to shrug off the effects of 1987, Aggarwal adds.

You can slow markets down, reform trading rules, and tap into extra information, but financial panics may never go away. It seems to be part of our collective human nature to occasionally reassess a situation, panic, and then all act at once.

Many see the markets as a precarious balance between fear and greed. Or, alternatively, irrational exuberance and unwarranted pessimism. "All you need is a shift in mass that's just big enough to push you toward the tipping point," Shefrin says.

IN FOR THE LONG HAUL
What should an individual investor do in the event of a financial crisis? If you're really sure that something fundamental has changed and the economy is heading toward recession or even another depression, it's probably in your interest to sell. But most experts advise waiting and doing nothing. "In volatile times, it is very likely that you [will be] the goat that other people are taking advantage of," University of Arizona's Lamoureux says. "It's often a very dangerous time to be trading."

Shefrin adds: "The chances of you doing the right thing are low." Don't think short-term, he says, and remind yourself of the long-term averages. For example, in any given year, stock markets have a two in three chance of moving higher. Other than that, it's nearly impossible to predict the future.

So, another financial panic may be inevitable. But relax: There's probably nothing you can do about it anyway. Anything you do might make your situation worse. So the best advice may be to send flowers to your stressed-out stockbroker, stick with your long-term investment strategy, and sit back and watch the market's roller-coaster ride.

Steverman is a reporter for BusinessWeek's Investing channel .

http://www.businessweek.com/investing/content/oct2007/pi20071011_494930.htm

Equity investors: Don't panic!

This week has heralded another sharp sell off in the stock market – but whatever private investors do they must not panic.

When there is a mass sell-off of assets everything falls. Photo: AP

By Garry White

5:02PM GMT 21 Nov 2011

Of course, the situation in Europe is serious – with debt concerns moving from Greece to Italy to Spain and now France. the US deficit is also of serious concern. However, events currently unfolding are not the end of the world. Equity markets are likely to recover from this crisis over the next few years as the global economy improves, but there will be plenty of pain on the way.

When there is a mass sell-off of assets everything falls – the good assets and the bad. Investing is a long term affair and panic selling could means good investments are sold when they are cheap. This defeats the main investment principles of buying low and selling high.

Of course, the value of an asset is only what someone else is prepared to pay for it – so although shares look cheap at the moment they could get cheaper in the short term. However, returns from the stock market over time – particularly when dividends are reinvested – are still likely to mean it is worth staying in the market.

There’s also the fact that panic selling can crystallise tax liabilities to consider.

The truth is, now is actually a great time to buy quality companies at what could be a bargain prices, as long as you have a sensible investment horizon. And are brave enough.  

Invest at the point of maximum pessimism." This is a famous quote from legendary investor John Templeton, who was one of the last century's most successful contrarian investors - hoovering up shares during the Great Depression. He was the founder of fund management group Templeton.

Conversely, the theory goes, you should sell at the point of maximum optimism.

It is important to remember that you will never time a market bottom or market top accurately. That's why Questor thinks the best investment strategy is to continue to drip-feed funds into the market – and this is especially the case when markets are falling.

This strategy is called pound-cost averaging and it makes good sense for investors with an appropriate time frame.

Although the sharp falls seen recently in equities is a concern – it is not a reason to panic. Sell in haste today and you may regret your decision in two year’s time.

http://www.telegraph.co.uk/finance/markets/questor/8904859/Equity-investors-Dont-panic.html

PANIC SELLING: Almost every market crash is a result of panic selling.

Panic Selling

What Does Panic Selling Mean?
Wide-scale selling of an investment, causing a sharp decline in price. In most instances of panic selling, investors just want to get out of the investment, with little regard for the price at which they sell.

Investopedia explains Panic Selling
The main problem with panic selling is that investors are selling in reaction to pure emotion and fear, rather than evaluating fundamentals. Almost every market crash is a result of panic selling. Most major stock exchanges use trading curbs and halts to limit panic selling, to allow people to digest any information on why the selling is occurring, and to restore some degree of normalcy to the market.


http://www.investopedia.com/terms/p/panicselling.asp#ixzz1ZxNKo0ai

Correction: CNBC Explains

Published: Friday, 5 Aug 2011 

By: Mark Koba
Senior Editor

A correction may sound like it means something is getting 'fixed' on Wall Street, but actually it's a word used to describe both a trigger for financial losses, as well as buying opportunites for investors.

Timothy A. Clary | AFP | Getty Images A concerned trader on the floor of the New York Stock Exchange.

So what is a correction? How does one come about? What does it mean for the stock market? CNBC explains.

What is a correction?

A correction is a decline or downward movement of a stock, or a bond, or a commodity or market index.

The amount of the decline is at least 10 percent and a true correction exceeds that amount.

In short, corrections are price declines that stop an upward trend.

Why do corrections happen?

Stocks, bonds, commodities, and everything else traded on the markets never move in a straight line, either up or down. At some point their value will change—for better or worse.

When stock or bond prices go up, it may seem like there's no end to how high they can go. When this happens, stocks or bonds become 'overbought.' That means some investors will try to buy into the rise of stock prices with the hope of making profits before a downward trend begins.

But as they do buy in, the investors who bought earlier—helping to push the stock or bond price up—will consider selling when they think the price is near a peak. Investors might base their thinking on an earnings report for a certain stock that shows flat profits, or a belief that a certain industry will face trouble. Any kind of 'bad' news can trigger a sell-off.

And sometimes, investors will simply take profits as the market heats up. In either case, the selling pressure drives prices down.

How long do corrections last?

Corrections generally last two months or less. They usually end when the price of a stock or a bond 'bottoms out'—for example, some will point to a stock reaching a 52-week low—and investors start buying again.

How is a correction different from a bear market or "capitulation"?

A correction is shorter in length and generally less damaging to investors than a bear market. A bear market happens when equity prices keep falling and investors keep selling into a downturn of 20 percent or more for the overall market.

The difference between a capitulation and correction is simply that a capitulation is more severe. A capitulation  , is said to occur when investors try to get out of the stock market as quickly as possible. It's also described as panic selling. Capitulation usually is based on investor fears that stock prices will plunge even further than the current low levels.

Bottoms—or the lowest price for a stock or market index—are formed more quickly in corrections than in capitulations.

Is a correction good for the market?

Many investors and analysts look at corrections as a necessary 'evil' to cool off an overheated stock or bond market. This is to prevent a huge sell-off or 'bubble burst,' as what happened with Internet stocks in 2000-2001.

It's believed that corrections adjust stock prices to their actual value or "support levels," and so, are not overpriced or inflated.

Many short-term investors look at corrections as a buying opportunity when the stock or the overall market has reached a bottom or the lowest price level. Their buying helps push the price back up and stops the correction.

What is an example of a correction?

Corrections are fairly common. We can look at the S&P Index to see one.

As the chart below shows, the S&P 500 closed at 1,363.61 on April 29, 2011, its highest level since June 5, 2008.

On Thursday, Aug. 4, 2011, at 11:26 a.m. ET, the S&P 500 hit a low of 1,225.95, entering “correction” mode, defined by a drop of 10 percent or more.

© 2011 CNBC.com

http://www.cnbc.com/id/44033215/Correction_CNBC_Explains

Capitulation: CNBC Explains

By: Mark Koba

Published: Thursday, 4 Aug 2011

Senior Editor

Traditionally, the word capitulation describes a surrender between fighting armies. What is capitulation when it's used on Wall Street? What does it signify? We explain.

cnbc.com

What is capitulation?

In simple terms, capitulation is when investors try to get out of the stock market as quickly as possible and look for less risky investments. It's also described as panic selling. It's usually based on investor fears that stock prices will fall further than they have.

Capitulation is usually signaled by a decline in the markets of at least 10% in one day.

In getting out of the market, investors give up any previous gains in stock price. That means they take a financial loss, just to get out of stocks. The thinking is: take a smaller loss now rather than a bigger one later.

Real capitulation involves extremely high volume—or high numbers of traded shares—and sharp declines in stock prices.

Why do investors capitulate?

Suppose a stock starts dropping in price. There are two choices. Investors stick it out and hope the stock begins to appreciate—or they can take the loss by selling the stock.

If the majority of investors decide to wait it out, then the stock price will probably remain stable. But if the majority of investors decide to capitulate and give up on a stock, they start selling and that starts a sharp decline in a stock's price.

Are there any benefits from capitulation?

Only for those buyers ready to swoop in.  After capitulation selling, common wisdom has it that there are great bargains to be had in the stock market. Why? Because everyone who wants to get out of a stock, for any reason, has sold it. The price should then, theoretically, reverse or bounce off the lowest price of the stock.

In other words, some investors believe that capitulation is the sign of a bottom and a chance to get stocks at a cheaper price than before the capitulation took place.

Is capitulation a way to gauge the markets?

Not at all. Capitulation is very difficult to forecast and use as a way to buy or sell stocks. There is no magical price at which capitulation takes place. Certainly during the trading day, stock prices and volumes are monitored and some measurement is used to determine if a capitulation is taking place and will remain so at the end of the day.

But most often, investors and market watchers look back to determine when the markets actually capitulated and see how far stocks have fallen in price for that one day of trading.

When have there been capitulations?

The stock market crash of 1929 that helped lead to the Great Depression, is a capitulation. In fact, it had more than one day of it.

On Oct. 24, 1929—what's known as Black Thursday—share prices on the New York Stock Exchange collapsed. A then-record number of 12.9 million shares was traded.

But more was to follow. Oct. 28, the first "Black Monday," more investors decided to get out of the market, and the slide continued with a record loss in the Dow for the day of 38 points, or 13 percent.

The next day, "Black Tuesday," Oct. 29, 1929, about 16 million shares were traded, and the Dow lost an additional 30 points.

More recently, there was a massive sell off or panic selling of stocks  on Oct. 10, 2008, in what can be considered a capitulation. Not only U.S. stocks, but global markets had major declines of 10 percent or more on one day.

Investors flooded exchanges with sell orders, dragging all benchmarks sharply lower. It's believed fears of a global recession and the U.S. housing slump sparked the sell-off.

© 2011 CNBC.com

http://www.cnbc.com/id/44022035/Capitulation_CNBC_Explains

Capitulation

What Does Capitulation Mean?
When investors give up any previous gains in stock price by selling equities in an effort to get out of the market and into less risky investments. True capitulation involves extremely high volume and sharp declines. It usually is indicated by panic selling.

The term is a derived from a military term which refers to surrender.


Investopedia explains Capitulation
After capitulation selling, it is thought that there are great bargains to be had. The belief is that everyone who wants to get out of a stock, for any reason (including forced selling due to margin calls), has sold. The price should then, theoretically, reverse or bounce off the lows. In other words, some investors believe that true capitulation is the sign of a bottom.


Read more: http://www.investopedia.com/terms/c/capitulation.asp#ixzz1ZsUZ26of

`Panic Selling' Doesn't Pay. Who is a panic seller?

Definition of Panic Seller.  This is an investor who: 

1.  sells on a day when the benchmark falls 2.5% or more,

2.  stays away from stocks for at least 20 trading days, and

3.  returns only after the initial loss has been recouped.

(Source:  Bank of America Merrill Lynch) 

`Panic Selling' Doesn't Pay in U.S. Stock Market: Chart of the Day

By David Wilson - Mar 15, 2011 10:27 PM GMT+0800l

U.S. stock investors who avoid “panic selling” are likely to be rewarded for their patience, according to a study by Bank of America Merrill Lynch.

This conclusion is based on a comparison of the Standard & Poor’s 500 Index with an adjusted version, calculated by the firm. The latter assumes an investor sells on a day when the benchmark falls 2.5 percent or more, stays away from stocks for at least 20 trading days, and returns only after the initial loss has been recouped.

The CHART OF THE DAY compares the S&P 500 with index readings derived from Merrill’s data, which goes back to 1960. The adjusted benchmark would have finished last year at 459.46, about 63 percent lower than its actual close.

“As tempting as it can be to exit the market after a sell- off in an attempt to buy back at a lower price, timing re-entry is very difficult,” David Bianco, chief U.S. equity strategist at the firm, wrote yesterday in a report. “The market’s best days tend to come very close to the worst days.”

Staying invested is a more rewarding strategy as long as the earnings outlook is intact and stocks aren’t too expensive, Bianco wrote. He sees profits climbing 11 percent this year at S&P 500 companies and expects the index to finish the year at 1,400, a gain of 8 percent from yesterday’s close.

There have been 29 years since 1960 in which the S&P 500 had at least one daily decline of 2.5 percent or more, according to Merrill. The panic-selling strategy did better than the index in only six of them, most recently in 2008.

http://www.bloomberg.com/news/2011-03-15/-panic-selling-doesn-t-pay-in-u-s-stock-market-chart-of-the-day.html

This article below is to remind us what happened in 2008.

Investors Survive Selloff But Worry What's Next

Published: Monday, 15 Sep 2008 | 4:51 PM

Investors survived the first trading day of the Wall Street financial crisis, but many remained worried about what happens next.

A day after investment bank Lehman Brothers filed for bankruptcy and Merrill Lynch was forced to sell itself to Bank of America, the focus of many investors turned to giant insurer American International Group [AIG 36.78 -0.72 (-1.92%) ], which is struggling for survival.

The market is worried about a possible failure of AIG as early as Tuesday morning, said Matt Cheslock, a senior specialist at Cohen Specialists, and traders just don't want to stick their necks out amid that kind of uncertainty.

"If AIG fails tomorrow morning, it's the same thing written all over this market," Cheslock said. "I don't think anyone is going to want to take any positions overnight."

US stocks closed sharply lower as worries about AIG—on top of the crises at Lehman and Merrill—sparked a 500-point drop in the Dow. Markets in Asia and Europe also sold off, though Tokyo and several other Asian money centers were closed for holidays.

The dollar sank against the yen and the euro.

Oil prices, responding to the turmoil in financial markets more than Hurricane Ike, plunged to $92 a barrel.

The Federal Reserve refused to provide temporary financing for AIG, which has incurred $18 billion in losses over the past three quarters from soured mortgages. But the government has asked Goldman Sachs [GS 157.25 -1.18 (-0.74%) ] and JP Morgan Chase [JPM 44.61 -0.69 (-1.52%) ] to lead a group of banks to offer up to $75 billion in credit for the troubled insurer.

But AIG's survival remains uncertain, and investors are worried that there are other companies that may need to raise capital to cover mortgage-related losses.

Treasury Secretary Henry Paulson said on Monday the U.S. financial system remained sound despite current stresses and he was prepared to take further actions if necessary to maintain stability.

"So far, the efforts of the US government have failed to bring any stability to the financial markets,'' said Kathy Lien, director of currency research at Global Forex Trading.

http://www.cnbc.com/id/26718389/Investors_Survive_Selloff_But_Worry_What_s_Next

Weathering a Panic

The central concept applicable to the 'buy and hold until fundamental changes' investor is the occasional need to play when it is painful.  But this concept specifically and only means to hold stocks that are being affected just by the overwhelming negative psychological forces that occasionally cause selling routs or panics in the whole market.

To put this very important limiting caveat another way:  when a crash or panic occurs, stocks should be 

• held only if they are going down because of market factors and 
• not if they are being affected by company factors.  

This should relate to only a few issues, however, because investors following a disciplined selling methodology (see related article below) already should have weeded out the bad performers and taken profits on the stellar performers well before a bear market reaches climax proportions.

So when appropriate selling has left an investor with only a few, high quality stocks, he can and should hold onto the gems and play through the difficult experience of a panic or crash.  He will be holding only a relatively small portfolio (having followed the other cashing-in suggestions well before the bottom nears), so his level of pain will be no worse than moderate.  And his cash holdings will give emotional comfort and provide the resources for acquiring stocks advantageously when prices get really low.

Some investors may see a contradiction in this advice because they were usually counseled that avoiding losses is the first priority and the best reason for selling.  But taking a short-term dose of paper losses in a crash - by holding quality issues - is a lesser risk than selling out during the fury, and hoping to have the courage and good executions to get back in at lower prices shortly afterward.

If an investor is down to just a few core holdings anyway, he is better advised to tough it out.   The very experience of playing in pain through a temporary crash (think of the October 1987 and October 1989 bashings) is of enormous instructional value despite the modest monetary cost involved.  The process of crisis-thinking and the need to make wrenching decisions that prove valid in short order will serve him well for the rest of his investment career.

Once he has successfully navigated the worst of the choppy investment seas, he will have learned survival lessons and will have internalized feelings and taken in an experience that will be forever his.  That experience deepens his understanding of the way the market works.  Probably most of all, having won at a different game, he develops the wisdom and courage to succeed in similar circumstances in the future.  And that provides the opportunity to make big profits in the handful of similar opportunities that will occur throughout the rest of his investing career.  He will know beyond any shadow of a doubt that the contrarian philosophy of investing works.

When caught in a panic, the central question is whether capitalism in the United States and major Western democracies will continue to function after the panic ends.  If the answer is yes, then there is no reason to sell at foolish levels.  In fact, the only rational thing to do is take courage and make buys.  Being gutsy enough to act on the contrarian test - refusing to sell good stocks cheap because Wall Street and Main Street have lost faith for a few days - insures appropriate selling.  It is difficult to buy in a panic.  Those who can do so are rational enough to sell with discipline as highs approach.

There is one more qualifier on whether to hold or sell after a panic has passed.  Once the panic subsides, there is a lift in the market.  But the effect is significantly different on various kinds of stocks.

• For some issues, there is a sharp snap-back rally; 
• for others, there is very little improvement.  

Just as it is not advisable to sell into the panic, it is prudent to reassess positions after the selling frenzy has subsided and the lift in prices has begun.

The object, as always, is to decide what to sell and what to hold.  Selling should not be urgent because pre-bear-phase tactics will have raised a lot of cash, so there's no need to sell to raise cash for margin calls or buying.  But because the goal is always to maximise return on capital and to take advantage of the time value of money, look closely at what to hold and what to sell after the panic has cleared.


Related:

To hold or to sell? Holding should occur only if no tests for selling are failed.