"Do not panic when shares experience short-term movements"

 

The principle of "Do not panic when shares experience short-term movements" is the practical application of discipline and long-term focus. It separates successful, patient investors from those who allow emotion and market noise to dictate their decisions.

Here is an elaboration on why this principle is vital and how short-term volatility relates to long-term returns.

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1. Volatility is Normal and Inevitable

• Volatility Defined: The day-to-day (or even minute-to-minute) fluctuation in stock prices is called volatility. It is a natural and permanent feature of the stock market.

• The Big Picture: As a long-term investor, your gains come from the fundamental growth of the businesses you own over many years, not the transient mood swings of the market. Historically, despite numerous financial crises, wars, and recessions, the broad stock market (like the S&P 500) has trended upward over multi-year and decade-long periods.

• The Math of Time: Research consistently shows that the probability of achieving a positive return in the stock market dramatically increases the longer you hold your investment. Over very long horizons (e.g., 15 to 20 years), the probability of generating positive returns has historically been extremely high, regardless of when you initially invested.

2. The Dangers of Panic Selling

The primary risk of panicking over short-term movements is locking in permanent losses and missing out on the recovery.

• Selling at the Bottom: Panicked investors sell out of fear when the market is low. They convert a paper loss (a decline in value) into a realized, permanent loss (a loss of capital).

• Missing the Best Days: Studies show that a disproportionately large share of the market’s gains occur during just a few of its best-performing days. These days often occur immediately after sharp downturns. If you sell out of panic, you are highly likely to miss the beginning of the rebound, severely hindering your long-term returns.

• The Wrong Focus: Panicking means you have shifted your focus from the quality of your investment (the company's earnings, business model, and future prospects) to the short-term ticker price, which is often disconnected from the underlying business value.

3. Profiting from Short-Term Volatility

Legendary long-term investors like Warren Buffett view market volatility not as a threat, but as an opportunity created by the panic of others.

• The "Sale" Sign: If your research confirms that a company is high-quality, well-managed, and has intact fundamentals, then a temporary market decline merely puts that stock "on sale."

• Averaging Down: A disciplined, non-panicked investor can use market dips as an opportunity to buy more shares of high-conviction winners at a discounted price, effectively lowering their overall average cost per share. This enhances future returns when the market inevitably recovers.

• Time Horizon as an Advantage: Day traders need volatility to make gains, but for the long-term investor (with a horizon of 10+ years), volatility offers the chance to buy, while the long-term trend of business earnings drives the ultimate gains.

4. How to Apply the Principle

To avoid panic, you must have a clear strategy and confidence:

• Investigate the Cause: When a stock drops, do not panic sell immediately. Instead, pause and ask: Is the drop due to a market-wide event (e.g., interest rate hike, geopolitical news) or a company-specific fundamental breakdown (e.g., failed product, debt crisis)? If it's a market-wide event, the stock is likely a bargain.

• Be Confident in Quality: Your protection against panic is the thorough research you conducted before buying the stock. If your analysis of the company's merit remains strong, you should remain confident and stay invested.

"Do not panic when shares experience short-term movements"

The principle of "Do not panic when shares experience short-term movements" is the practical application of discipline and long-term focus. It separates successful, patient investors from those who allow emotion and market noise to dictate their decisions.

Here is an elaboration on why this principle is vital and how short-term volatility relates to long-term returns.

---

1. Volatility is Normal and Inevitable

• Volatility Defined: The day-to-day (or even minute-to-minute) fluctuation in stock prices is called volatility. It is a natural and permanent feature of the stock market.

• The Big Picture: As a long-term investor, your gains come from the fundamental growth of the businesses you own over many years, not the transient mood swings of the market. Historically, despite numerous financial crises, wars, and recessions, the broad stock market (like the S&P 500) has trended upward over multi-year and decade-long periods.

• The Math of Time: Research consistently shows that the probability of achieving a positive return in the stock market dramatically increases the longer you hold your investment. Over very long horizons (e.g., 15 to 20 years), the probability of generating positive returns has historically been extremely high, regardless of when you initially invested.

2. The Dangers of Panic Selling

The primary risk of panicking over short-term movements is locking in permanent losses and missing out on the recovery.

• Selling at the Bottom: Panicked investors sell out of fear when the market is low. They convert a paper loss (a decline in value) into a realized, permanent loss (a loss of capital).

• Missing the Best Days: Studies show that a disproportionately large share of the market’s gains occur during just a few of its best-performing days. These days often occur immediately after sharp downturns. If you sell out of panic, you are highly likely to miss the beginning of the rebound, severely hindering your long-term returns.

• The Wrong Focus: Panicking means you have shifted your focus from the quality of your investment (the company's earnings, business model, and future prospects) to the short-term ticker price, which is often disconnected from the underlying business value.

3. Profiting from Short-Term Volatility

Legendary long-term investors like Warren Buffett view market volatility not as a threat, but as an opportunity created by the panic of others.

• The "Sale" Sign: If your research confirms that a company is high-quality, well-managed, and has intact fundamentals, then a temporary market decline merely puts that stock "on sale."

• Averaging Down: A disciplined, non-panicked investor can use market dips as an opportunity to buy more shares of high-conviction winners at a discounted price, effectively lowering their overall average cost per share. This enhances future returns when the market inevitably recovers.

• Time Horizon as an Advantage: Day traders need volatility to make gains, but for the long-term investor (with a horizon of 10+ years), volatility offers the chance to buy, while the long-term trend of business earnings drives the ultimate gains.

4. How to Apply the Principle

To avoid panic, you must have a clear strategy and confidence:

• Investigate the Cause: When a stock drops, do not panic sell immediately. Instead, pause and ask: Is the drop due to a market-wide event (e.g., interest rate hike, geopolitical news) or a company-specific fundamental breakdown (e.g., failed product, debt crisis)? If it's a market-wide event, the stock is likely a bargain.

• Be Confident in Quality: Your protection against panic is the thorough research you conducted before buying the stock. If your analysis of the company's merit remains strong, you should remain confident and stay invested.

This video discusses why patience and long-term thinking are crucial during market uncertainty.

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

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.

Shares tumble as all the bears come out

Shares tumble as all the bears come out
May 25, 2010 - 4:15PM

Australian shares tumbled today, hitting fresh nine-month lows as investors remain spooked by euro-zone instability, while rising tensions on the Korean peninsula also discouraged buyers.

The benchmark S&P/ASX200 index closed down 130.1 points, or 3 per cent, at 4265.3, its lowest close since August. The broader All Ordinaries index was off 126.5 points, or 2.9 per cent, at 4286.3.

At home, all the major sub-indexes were down, with energy shares off 3.9 per cent, materials down 3.7 per cent and financials slumping 3 per cent.

The Aussie dollar also resumed its retreat, dropping nearly 2 US cents to sink to 81.3 US cents.

About $150 billion has been wiped from the market this month, with the All Ordinaries off 11 per cent so far - the biggest slide since October 2008 when the collapse of US investment bank Lehman Brothers sent financial markets into a tailspin.

Europe's fumbling response to a debt crisis in Greece and bulging deficits in other euro-zone countries has unnerved markets, and the central bank takeover of a small Spanish lender at the weekend stoked the latest fears of a wider meltdown.

Across the region, other major markets were also sharply lower. South Korea's Kospi Index was down 4.3 per cent after a report said North Korea ordered its military to prepare for war last week. Japan's Nikkei 225 was off 2.7 per cent, with the benchmark indexes in Hong Kong and Singapore both down more 2 per cent.

“It appears that every single bear in Asia is emerging from its caves. It’s the complete reversal of what we’re seeing yesterday,” said Arab Bank Australia treasury dealer David Scutt. “Banks are being smacked. Commodity producers are being smacked. An all-around bad day for the markets.”

Also, short-term banks bill futures were selling off, Mr Scutt said.

"This is another sign that markets are wary of another liquidity crisis forming and mirrors the increase in Libor rates seen overnight in London."

Libor, the three-month US dollar London interbank offered rate - a key measure of the health of the credit markets - rose to 0.5 per cent overnight, the highest since July 2009. The increase suggests that there is growing caution among banks about lending to each other. Libor hit 3.6 per cent at the end of 2008, during the height of the financial crisis.

“Worryingly, the same feature was seen in the months leading up to and following the collapse of Lehman Brothers in 2008.”

Blue chips tumble

The world’s biggest miner, BHP Billiton, fell $1.52, or 4 per cent, to $36.28 and rival Rio Tinto dropped $2.45, or 3.8 per cent, to $61.70.

Iron ore miner Fortescue renewed its criticism of the government’s mining super profits tax plans and said it is likely to delay plans to start paying dividends due to the proposed tax, warning investors its shares could fall further as a result.

The shares duly extended early losses, to finish down 28 cents, or 7.5 per cent at $3.44.

The four major banks closed lower also.Commonwealth Bank was off $1.92, or 3.7 per cent, at $50.31 and Westpac declined 90 cents, or 3.9 per cent, to $22.26. ANZ closed down 56 cents, or 2.6 per cent, at $21.34 and National Australia Bank was 80 cents, or 3.3 per cent, lower at $23.76.

In the energy sector, Oil Search had dipped 26 cents to $5.25, Woodside was down $1.46, or 3.4 per cent, at $41.37 and Santos gave up 54 cents, or 4.4 per cent, to $11.75.

Flight Centre bucks trend

Flight Centre shares rosed 2.9 per cent to $16.80 after the travel firm upgraded its profit guidance for 2010 to a pretax profit of $190 million to $200 million, up from forecasts of $160 million to $180 million.

Healthscope saw its shares slip 1.9 per cent to $5.15, after private equity firm Blackstone Group joined a group bidding $US1.5 billion for the hospital operator, a source familiar with the situation said.

Minara Resources fell 4.5 cents, or 6.3 per cent, to 66.50 cents after it said it is looking offshore to more desirable tax jurisdictions.

Transurban declined 11 cents, or 2.5 cents, to $4.30 after the Takeovers Panel has refused to make interim orders sought to stop a rights issue by the toll roads operator.

Agribusiness and real estate group Ruralco Holdings was steady at $2.50 after it said it expected a solid full year financial result after boosting first half net profit by 23 per cent.

The most traded stock by volume was Australian Mines, with 222.32 million shares changing hands for $222,328 thousand. The stock was steady at 0.1 of a cent.

Preliminary national turnover was 2.26 billion shares worth $5.91 billion, with 250 stocks up, 867 down and 256 unchanged.

Losses 'overdone'

The Australian market has fallen 14 percent from its recent peak in April as the European worries, the Australian dollar's fall and a planned mining tax whacked sentiment.


"It is definitely overdone, the forward P/E of the market is 10 times which is extraordinarily low," said E.L. & C. Baillieu director Richard Morrow.

The long-term average forward price/earnings ratio for Australian stocks is around 14 times.

"People are staring down the barrel at this horrendous tax and everything has gone into abeyance ahead of that," he said.

http://www.smh.com.au/business/markets/shares-tumble-as-all-the-bears-come-out-20100525-w8i2.html

Should you panic? Advice for mum and dad investors

Should you panic?
RICHARD WEBB
May 23, 2010

IT WAS like someone rang a bell. Just before 11am on Friday the waves of panic selling that had been demolishing Australian share prices dried up and bargain hunters came out of the woodwork.

Stocks did an abrupt about-face and, after being 3 per cent down in early trade, clawed their way back to be almost level by Friday's close. You could hear the sighs of relief all the way along Collins Street.

These days, financial markets recover almost as quickly as they fall, and local shares, even after Friday's intra-day recovery, remain 15 per cent or so below their April highs. They are sitting at historically cheap valuations.

So what should mum and dad investors do?

• Jump into the sharemarket, buying with their ears pinned back to ride a swift market recovery? 
• Should they loosen off their share load on expectation of more falls to come as we head into ''Global Financial Crisis II - Europe falters''? 
• Or should they simply sit tight and ride out the volatility until things become a little clearer?

The answer is, of course, none of these. Shares are for the medium to long term and you should not try to second-guess short-term market moves. Traders don't often get it right and they do this for a living.

If you are looking to buy, then look to the long term. It should also be a long-term view that governs your decision to sell, rather than panic over the market falling for a few weeks.

As Austock senior adviser Michael Heffernan puts it, the problem is that once panic prevails, logic goes out the window.

''This is not September/October 2008, but the sharemarket is driven by fundamentals and sentiment, and sentiment is the predominant driver at the moment,'' Mr Heffernan says. ''Cooler heads might perceive we have reached a low point but the market has a mind of its own at the moment and it will defy rationality.''

He says that if you have a portfolio of solid, dividend-paying, blue-chip shares and are risk averse, then ''I would recommend you ride this out and just wait and see.

''If you are looking to buy, and I generally like to buy when the market is going up rather than trying to pick a bottom, I wouldn't be necessarily going head over heels into any sector just yet, but I would suggest you look at the banks, major retailers and mid caps. I would wait until after the election before getting back into the big resources stocks or Telstra, though.''

Pengana Emerging Companies fund manger Ed Prendergast agrees on the mixed market sentiment.

''It's murky at the moment and at times like this it's dangerous to be too definitive.

China may be slowing, Greece is clearly an issue and the resource super profits tax is adding fuel to the fire in our market, but it's hard to see this escalating into another GFC - I would be totally surprised by that,'' Mr Prendergast says.

''At the moment it feels like a lot of people trying to get out of a burning cinema and they are all trying to squeeze through the one door - but if you are taking a medium-term view you shouldn't be fazed too much by the short-term volatility; nothing has changed for many Australian companies but their share price.''

So if Mr Prendergast's mum wanted to invest in shares right now, what would he recommend? ''I would still say she should buy but not invest all of her money in one day - I would say some now, some in three weeks' time and some three weeks after that. That way you've got more time to assess the risks.''

Sean Conlan, senior adviser with Macquarie Private Wealth, says the recent selling in the market was almost entirely driven by foreign investors taking profits - which is also why he believes the Australian dollar took such a pounding as they moved their money out of the country.

''There has been a lot of offshore money parked in Australia as it was considered a safe haven through the global financial crisis and as a bet on China,'' he says.

''But triggered by the announcement of the resource super profits tax, these major overseas funds all decided to take their profits and get out - it's not really been panic selling but a reweighting by foreign investors.''

Mr Conlan says local shares are now cheap, trading at a forward price-earnings ratio of 12.8 times, against the local market's long-term average of 14.6 times.

''It's going to be volatile going forward for a while but there is an opportunity to take advantage of the current value showing in the market.''

The confidence crunch

Why is it so?



■Greece and Portugal sovereign debt concerns: will the $US1 trillion German-backed Greek rescue package work?

■Tighter banking legislation in the US approved on Thursday in response to the subprime debacle: will it constrain the US banking system?

■US economic recovery worries: is employment growth petering out?

■Criminal action against Goldman Sachs: fears over the implications.

■Economic tightening in China: has it gone too far given that property prices in Beijing have fallen 20 per cent and what does this mean for commodity prices long-term?

■Resources tax: what does it mean for our best-performing industry?

■The ash cloud over Europe and the oil spill off the US: both have had major negative economic and environmental implications.

Source: The Age

http://www.smh.com.au/business/should-you-panic-20100522-w2t1.html

Panic sends Dow to worst ever drop

Panic sends Dow to worst ever drop
MARINE LAOUCHEZ
May 7, 2010 - 8:49AM
AFP

Panic selling swept US markets on Thursday as the Dow Jones plunged a record of almost 1000 points before recouping more than half those losses.

It was unclear whether the sudden sell-off, the Dow's biggest ever intra-day drop, was the result of fears over the Greek debt crisis, a mistaken trade or technical error.

The crash began shortly before 2.25pm local time, when in a white-knuckle 20 minutes America's top 30 firms saw their share prices dive 998.5 points, almost nine per cent, wiping out billions in market value.

The drop eclipsed even the crashes seen when markets reopened after September 11, 2001 and in the wake of the Lehman Brothers collapse.

The Dow later recovered, closing nearly four per cent down, but spooked traders were left wondering whether a technical glitch had caused the blue-chip index to erode three months of solid gains.

Rumours swirled that a Citigroup trader had mistakenly sold 16 billion rather than 16 million stocks in Procter and Gamble shares, forcing the Dow down.

Shares in the consumer goods giant lost more than seven US dollars, falling in a similar pattern to the Dow, trading at a low of 55 US dollars a share.

"At this point, we have no evidence that Citi was involved in any erroneous transaction," said company spokesman Stephen Cohen.

A spokesperson for the New York Stock Exchange said the cause was still not known.

"We don't know, right now we're looking into it," said Christian Braakman, "it's all speculation."

But after three days in which stocks have suffered triple-digit intra-day losses because of concern about Greece's debt crisis, it was clear that the sell-off was real for some investors.

At the close, the Dow had recovered to 10,520.32, down 347.80 (3.20 per cent), while the Nasdaq was down 82.65 points (3.44 per cent) at 2,319.64. The Standard & Poors 500 Index was down 37.72 points (3.24 per cent) to 1,128.15.

Images of rioting as the Greek parliament passed unpopular austerity measures did little to ease market panic.

The parliament approved billions of euros of spending cuts pledged in exchange for a 110 billion euros ($A155 billion) EU-IMF bailout just one day after three bank workers died in a firebomb attack during a huge protest.

On Thursday, police charged to scatter hundreds of youths at the tail-end of a new protest outside parliament that drew more than 10,000 people.

In Lisbon, European Central Bank chief Jean-Claude Trichet battled to reassure financial markets that Greece's debt crisis would not end in default, but could not prevent the euro from falling to a 14-month low against the dollar.

Pleas for patience from the White House also had little impact.

The White House said that reforms in Greece were "important" but would take time and that the US Treasury was monitoring the situation.

"The president has heard regularly from his economic team," said White House spokesman Robert Gibbs, adding that President Barack Obama's top economic officials were closely communicating with their European counterparts.

© 2010 AFP

http://news.smh.com.au/breaking-news-business/panic-sends-dow-to-worst-ever-drop-20100507-uhgu.html

US stocks plummet, then recover some losses

US stocks plummet, then recover some losses
May 7, 2010 - 6:56AM

US stocks plunged 9 per cent in the last two hours of trading overnight before clawing back some of the losses as the escalating debt crisis in Europe stoked fears a new credit crunch was in the making.

The Dow suffered its biggest ever intraday point drop, which may have been caused by an erroneous trade entered by a person at a big Wall Street bank, multiple market sources said.

Indexes recovered some of their losses heading into the close but equities had erased much of their gains for the year to end down just over 3 percent, the biggest fall since April 2009.

"We did not know what a stock was worth today, and that is a serious problem," said Joe Saluzzi of Themis Trading in New Jersey.

Traders around the world were shaken from their beds and told to start trading amid the plunge as investors sought to stem losses in the rapid market sell-off.

Declining stocks outnumbered advancers on the New York Stock Exchange by more than 17 to 1. Volume soared to it highest level this year by far.

Nasdaq said it was investigating potentially erroneous transactions involving multiple securities executed between 2.40pm and 3pm New York time.

Investors had been on edge throughout the trading day after the European Central Bank did not discuss the outright purchase of European sovereign debt as some had hoped they would to calm markets, but gave verbal support instead to Greece's savings plan, disappointing some investors.

The Dow Jones industrial average dropped 347.80 points, or 3.20 per cent, to 10,520.32. The Standard & Poor's 500 Index fell 37.75 points, or 3.24 per cent, to 1128.15. The Nasdaq Composite Index lost 82.65 points, or 3.44 per cent, to 2319.64.

The sell-off was broad and deep with all 10 of the S&P 500 sectors falling 2 to 4 per cent. The financial sector was the worst hit with a fall of 4.1 per cent.

Selling hit some big cap stocks. Bank of America was the biggest percentage loser on the Dow, falling 7.1 per cent to $US16.28. All 30 component of the Dow closed lower.

An index known as Wall Street's fear gauge, the CBOE Volatility Index closed up more than 30 per cent at its highest close since May 2009. It had earlier risen as much as 50 per cent.

The mounting fears about a spreading debt crisis in Europe curbed the appetite for risk and put a report of weak US retail sales into sharper relief. Most top retail chains reported worse-than-expected same-store sales for April, sparking concerns about consumer spending, the main engine of the US economy.

That hit shares including warehouse club Costco Wholesale Corp, which fell 3.9 per cent to $US58.03, and apparel maker Gap Inc, which lost 7.2 per cent at $US22.91.

The head of the ECB, Jean-Claude Trichet, said on Thursday that Spain and Portugal were not in the same boat as Greece, but the risk premium that investors demand to hold Portuguese and Spanish government bonds flared to record highs.

Reuters


http://www.smh.com.au/business/markets/us-stocks-plummet-then-recover-some-losses-20100507-uh8l.html

'Fat finger' trade forces US stocks dive

'Fat finger' trade forces US stocks dive
May 7, 2010 - 6:30AM

The biggest intraday point drop ever for the Dow Jones Industrial Average may have been caused by an erroneous trade entered by a person at a big Wall Street bank that in turn triggered widespread panic-selling.

At one stage, the Dow was down a whopping 998 points - or 9 per cent - before rebounding but it was still sharply lower for the session as continuing worries about Greece and the so-called sovereign debt contagion ate into investor confidence.

The so-called "fat finger" trade apparently involved an exchange-traded fund that holds shares of some of the biggest and most widely traded stocks, sources said. The trade apparently was put in on the Nasdaq Stock Market, sources said.

But US stocks still ended sharply lower, as continuing worries about the debt crisis in Greece ate into market confidence, prompting a wide-spread sell-off.

US stocks posted their largest percentage drop since April 2009, with all three major indexes ending down more than 3 per cent.

Indexes earlier in the afternoon had plunged even more steeply, before paring losses.

Observers questioned why Procter & Gamble’s stock tumbled precipitously - and some say that could have been behind the massive plunge.

Both Fox News and CNBC reported that a trading error involving P&G stock could have been responsible for part of a dip that dragged the Dow Jones Industrial Average within a hair’s breadth of a 1000-point drop.

The sudden sell-off saw investors desert stocks wholesale.

But P&G’s stock, which had been trading at $US62, suddenly began to crash, falling around 20 per cent at one point for no apparent reason.

The Dow Jones industrial average ended down 347.80 points, or 3.2 per cent, at 10,520.32. The Standard & Poor's 500 Index was off 37.75 points, or 3.24 per cent, at 1128.15. The Nasdaq Composite Index was down 82.65 points, or 3.44 per cent, at 2319.64.

Several sources said the speculation is that the trade was entered by someone at Citigroup. A Citigroup spokesman said it was investigating the rumour but that the bank currently had no evidence that an erroneous trade had been made.

http://www.smh.com.au/business/markets/fat-finger-trade-forces-us-stocks-dive-20100507-uh91.html

Selling Hysteria

For the most part, it is in short-term trades that prices are driven by emotion.  Mid-term and long-term investments are usually influenced more by the fundamentals.

Bubbles burst in the wake of hysteria, while plummeting prices usually end in panic.

You can see panic in falling prices when you see them collapsing straight down day after day for extended periods.  Historically, long periods of selling have ended in "selling climaxes" when everyone finally panics and dumps to get out of the market at any price no matter what the fundamental reality might be.

Large price declines across the board should attract your attention.  A good rule of thumb is to sell during times of market hysteria and buy during times of panic.  

Always remember to buy low and sell high.  It sounds so simple, but it is extremely difficult.  Just keep this dictum in mind always - especially when your emotions are getting the best of you.

Ref:
Jim Rogers
A Gift to My Children

When you are caught in a market panic

When you are caught in a market panic

In fact, the only rational thing to do is take courage and make buys. Being gutsy enough to act on our contrarian test - refusing to sell good stocks cheap because Wall Street and Main Street have lost faith for a few days - ensures that your earlier selling at better levels, or not at all, will prove appropriate.

It will be emotionally difficult to buy in a panic. those who can do so are demonstrably rational and therefore also calm enough to sell with discipline as the prior highs approached.

So, should you find yourself in the midst of a crisis in the future, remember:

•Do not engage in panic selling.


•Sit tight and stick to your strategy.


•If you are a long-term, buy-and-hold investor, do hold on.


•If you are an adventurous investor, follow your strategy to buy on dips.


Make sure your overall portfolio is designed to limit your potential losses during a substantial market decline.

http://myinvestingnotes.blogspot.com/2009/10/when-you-are-caught-in-market-panic.html

Behavior of the Stock Market

The behavior of Stock Market and the prices of stocks depend greatly on the speculation of the investors. So, over- reactions and wrong speculation can give rise to irrational behavior of the Stock Market. Excessive optimistic speculation of future prospects can raise the prices of stocks to an extreme high and excessive pessimism on the part of the investors can result in extremely low prices. Stock Market behavior is also affected by the psychology of “Group Thinking”. The thinking of a majority group of people many times influences others to think in the same line and the Stock Market behavior gets naturally affected.

Sometimes the Stock Market behavior is affected by rumors and mass panic. The prices of the stocks fluctuate tremendously by the economic use even if it has nothing to do with values of stocks and securities.

So, it is extremely difficult to make predictions about the Stock Market and the inexperienced investors who are not that much interested in financial analysis of stocks; rarely get the financial assistance from the Stock Market at the time of need.

When you are caught in a market panic

In fact, the only rational thing to do is take courage and make buys. Being gutsy enough to act on our contrarian test - refusing to sell good stocks cheap because Wall Street and Main Street have lost faith for a few days - ensures that your earlier selling at better levels, or not at all, will prove appropriate.

It will be emotionally difficult to buy in a panic. those who can do so are demonstrably rational and therefore also calm enough to sell with discipline as the prior highs approached.

So, should you find yourself in the midst of a crisis in the future, remember:


•Do not engage in panic selling.

•Sit tight and stick to your strategy.

•If you are a long-term, buy-and-hold investor, do hold on.

•If you are an adventurous investor, follow your strategy to buy on dips.

Make sure your overall portfolio is designed to limit your potential losses during a substantial market decline.