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.

Pro-active action in a panic or crash

When appropriate selling has left an investor with only a few, high-quality stocks, he can and should hold onto those gems and play through the difficult experience of a panic or crash. He will be holding only a relatively small portfolio, so his level of pain will be no worse than moderate.

Financial crisis: The options for nervous investors?

Financial crisis: The options for nervous investors?
For everyday investors who have so far stood firm and headed the calls not to panic, they must be wondering whether their courage will pay dividends.

By Paul Farrow
Published: 9:10AM BST 30 Sep 2008

The FTSE100 has fallen to four year low leaving investors wondering whether worse is to come.

Henk Potts at Barclays Stockbrokers, said: "Inevitably this will be an extremely volatile market for sometime and there are some big hurdles to overcome. But many people with a brave heart are seeing this as a buying opportunity - our ratio of buyers to sellers yesterday was 72:28."


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This time a year ago the overall message was also to stay calm – although one stockbroker was a little more frank: "If you are going to panic, then panic early."

Those that refused to hold their nerve and did indeed panic, will be feeling smug right now because the bear market has long arrived. The FTSE100 has fallen from 6,200 to below 4,600 since 2004.

All but the most hardened investors will be wondering whether it still makes sense to cut and run. It is easy to be advised to stick with it, but seeing the pounds drop day by day is difficult to take – and with further woe widely predicted then who can blame investors from saying enough is enough.

Mark Dampier, head of research at Hargreaves Lansdown, said: "In all honesty no one has experience anything quite like this so any view is just that a view. In the UK the financial/property crisis will herald a UK recession for the whole of 2009. But stock markets are a discounting mechanism and will bottom well before the economy does which makes it very difficult to judge, as bad news will predominate.

"September and October are notoriously bad months in the stock markets and are living up to their name but we are now nearer the end game with markets. The politicians in the US will have to swallow their pride and egos as John Major did in 1992 and comeback with a package. This is not a bail out of Wall Street rich kids – it hits everyone and especially those in the real economy. It will be messy until economically illiterate politicians are made to see sense by the markets.

"At times like this I am reminded of the words of St John Templeton that 'the time of maximum pessimism is the best time to buy'. We are surely getting very close to that point."

Andrew Merricks, at Brighton-based Skerritts Consultants, says: "Thinking logically, not every company will go bust (far from it), so there must be a floor to which valuations can fall before bouncing. Perhaps we need to take notice of other regions than the UK, which is traditionally where we feel most comfortable. The positives are, admittedly, relative, but there are some. Firstly, the dividend yield on the FTSE All Share has exceeded the yield on the 10-year gilt.

"This historically has been a great indicator to future share price rallies, with the last time this happened being in March 2003 just as the markets took off. The other similarity with 2003 is that there were articles at that time questioning whether equities would ever work again and we had entered the “capitulation” stage, when the everyday investor had given up hope. Today feels somewhat similar. The world will be a different place as a consequence of September 2008. If this is so, it should be at the top of everyone’s priorities who has savings, investments or pensions to reassess how theirs will fare as events unfold."

Boll Doll, vice-chairman and chief investment officer for global equities at BlackRock, said: "The current situation ranks among the most difficult investors have faced in memory, and perhaps in generations. De-leveraging and re-pricing of risk have been exacting a heavy toll on the housing, credit and equity markets. The volatility in oil and other commodity prices, coupled with uncertainty about the direction of government policy and the outcome of the coming election, have made it difficult for investors to find their footing.

Nevertheless, investors should recognise that we are in the midst of panic and outright liquidation conditions, which are usually signs of the climax in selling. While the U.S. financial sector (which has been at the heart of the problem) has experienced a significant downturn in recent weeks, that sector has not broken through the lows it established in mid-July. To us, all of this suggests that equity markets are still in the midst of a bottoming phase."

Anthony Bolton, the Fidelity fund guru – who has delivered the goods – says that if you find it difficult to stay invested in the bear market and are panicked by the bad news, then perhaps equity investing is not right for you. If that's you, cash is the obvious alternative. You can get rates of more than 6.5 per cent on the market. Bolton has started to buy shares over the past few days.

Gold is the other classic safe haven and despite its price rising in recent days as investors search for low risk assets, it is still viewed as such. About a year ago, the gold price was $667 an ounce, but it rose to a peak of over $1,000 on 17 March – coinciding with the collapse of Bear Stearns – before falling back to its current level of around $900 this week.

If you are worried about losing money, consider a guaranteed equity bond (Geb). These are fixed-term savings plans that pay out a proportion of any gains in the stock market index or indices to which they are linked. If the market falls, the initial investment is returned in full. But be aware that any index growth excludes dividends, which make a huge difference to overall returns. And ensure the plan gives you a cast iron guarantee that your capital will be returned in full whatever happens to the stock market.

For those happy to remain invested in shares, Bolton says to focus on large, good quality companies. Avoid at all costs smaller and medium-sized companies with weak balance sheets, he says.

And if you want to stick with it then take these words from Maynard Keynes, perhaps the most famous investor of them all for comfort. He wrote in 1937: "It is the one sphere of life and activity where victory, security and success is always to the minority and never to the majority. When you find anyone agreeing with you, change your mind. When I can persuade the board of my insurance company to buy a share, that, I am learning from experience, is the right moment for selling it."

Mistakes to Avoid - Panicking When the Market Is Down

Panicking When the Market Is Down

Going against the grain takes courage but pays off.

Stocks are generally more attractive when no one else wants to buy them, not when barbers are giving stock tips. It's very tempting to look for VALIDATION - or other people doing the same thing - when you're investing, but history has shown repeatedly that assets are cheap when everyone else is avoiding them. (Sir John Templeton: "The time of maximum pessimism is the best time to buy.")

1979: Business Week cover story asked the question, "The Death of Equities?"
Not long after, it was the start of an 18 year bull market in stocks.

1999: Barron's featured Warren Buffett on its cover, asking, "What's Wrong, Warren?" and bemoaning Buffett's aversion to technology stocks.
Over the next three years, the Nasdaq tanked more than 60 percent, and Berkshire Hathaway shares appreciated 40%.

Morningstar has conducted every year for the past several years, in which the performance of unpopular funds were looked at. The asset classes that everyone hated outperformed the ones that everyone loved in all but one rolling three-year period over the past dozen years.

The difference can be striking. For example, investors who went where others feared to tread and bought the three least-popular fund categories at the beginning of 2000 would have had roughly flat investment returns over the subsequent three years. That was much better than the market's average annual loss of about 15% over the same time period and miles ahead of the performance of the popular fund categories, which declined an average of 26% during the three-year period.

Going against the grain takes courage, but that courage pays off. You'll do better as an investor is you think for yourself and seek out bargains in parts of the market that everyone else has forsaken, rather than buying the flavour of the month in the financial press.

Panic of 2008

The Wall Street Panic of 2008
By Todd Wenning
October 8, 2008 Comments (14)


Panic: In economics, acute financial disturbance, such as widespread bank failures, feverish stock speculation followed by a market crash, or a climate of fear caused by economic crisis or the anticipation of such crisis.
-- Britannica Online

Make no mistake -- by this definition, what we've witnessed so far in 2008 is nothing less than a global market panic.

Acute financial disturbance? Freddie Mac and Fannie Mae imploded. Bear Stearns got "rescued" along with AIG (NYSE: AIG), but somehow Lehman Brothers wasn't saved. Money markets "broke the buck," and there was a formal bank run on IndyMac.

Feverish speculation followed by a crash? Our housing bubble fueled excessive borrowing and risky lending practices, resulting in the credit crisis we're now dealing with. The S&P 500 is down 31% year to date, erasing the past five years of market gains.

Climate of fear? U.S. investor sentiment is at record lows, and the CBOE Volatility Index (the "fear index") has posted all-time highs in recent days. No one seems to know where the next shoe will drop.

The list, sadly, could go on.

Don't panic
Of course, no one wants to call this a market "panic." Instead, in most places it's been labeled a "crisis." In fact, the term "panic" hasn't been widely used to describe a market since the Panic of 1907 -- which is unfortunate, because understanding this as a panic has something to teach us.

In the 19th century (the high time for market panics), Yale professor William Graham Sumner defined a panic as:

... a wave of emotion, apprehension, alarm. It is more or less irrational. It is superinduced upon a crisis, which is real and inevitable, but it exaggerates, conjures up possibilities, takes away courage and energy.

In other words, the subprime and credit mess is the "crisis," and the "panic" is the exaggerations and doom-and-gloom language that come with it. We've seen plenty of that in recent months. Three of the world's major financial publications have likened our current economy to the Great Depression more than 250 times so far this year. So please, let's call this market by its proper name: the Panic of 2008.

Fortunately, "a panic," Sumner continued, "can be partly overcome by judicious reflection, by realization of the truth, and by measurement of facts."

Let us be judiciously reflective
So what do the panics of the early 20th century tell us about how we might overcome this one?

The last official panic -- the Panic of 1907 -- shook the U.S. economy to its core. Wall Street brokerages failed, depositors ran on banks, well-known companies went under, and the market's liquidity was in question. (Sound familiar?) In this instance, J.P. Morgan and friends famously put together $25 million to keep the market afloat -- a role now occupied by the Federal Reserve. By 1909, the Dow Jones index had more than recovered from pre-panic highs.

In 1914, the year the Great War began in Europe, the U.S. stock markets actually closed for nearly four months after foreign investors began pulling their money out of U.S. equities en masse to support the war effort. When it reopened, the market was devalued about 30%, but sustained rallies doubled that opening by the end of 1916.

Then, of course, came the Great Depression -- the single most important economic event in U.S. history -- which began with the Crash of 1929 and lasted arguably until the U.S. entered World War II in 1941. In 1932, unemployment hit 24.9%, and more than 9,000 banks failed during the 1930s. And there were no federally insured deposits until the Banking Act of 1933 created the FDIC, so when the bank failed, your money went with it. In fact, Wall Street's very future -- not to mention the economic model of capitalism -- was in question.

For those investors who had both the money and the courage to invest in the 1930s, it paid off. One man famously borrowed money to buy 104 U.S. stocks trading for less than $1 a share in 1939. Talk about investing at the point of maximum pessimism! Four years later, though, his money had quadrupled. His name, of course, was John Templeton.

OK, what's your point?
Judicious reflection, realization of the truth, and measurement of facts all say the same thing: We've seen markets like today's before -- and some far worse. And in every case, the point at which the market has turned irrational or overly pessimistic is precisely the time we long-term investors should have bought equities.

Despite the headlines proclaiming the next Great Depression, this is no Great Depression -- only a panic helped along by the short-term mind-set of the financial industry. Financial media's job is to attract readership by sensationalizing news events, and financial institutions, which are built on commissions and fees, want to keep money moving in and out in order to bulk up their own revenues. So both fan the flames of panic.

Individual investors like us do not have the advantage versus Wall Street when it comes to short-term trading, but we do have longer time horizons. Wall Street focuses on minutes, hours, and days, while we focus on years and decades. And that's what makes their panics a good time for us to buy.

Let's take the most modern example of market irrationality -- the dot-com bubble and subsequent burst -- and see what's happened to some quality names since the S&P 500 was near its low in September 2002.

Company
Returns (9/30/2002-Present)

Cisco Systems (Nasdaq: CSCO)
80%

Oracle (Nasdaq: ORCL)
113%

Schlumberger (NYSE: SLB)
264%

CVS Caremark (NYSE: CVS)
139%

Baxter (NYSE: BAX)
127%

Adobe Systems (Nasdaq: ADBE)
201%


Data provided by Capital IQ. Returns adjusted for dividends.


You didn't need to be a market genius to invest in these names in 2002. They were all well-known to both consumers and investors. All six had been beaten down considerably by the bear market, though, and that downturn presented investors with excellent opportunities to buy great companies at great prices.

Ironically enough, however, the third quarter of 2002 had the fewest equity-based mutual fund assets of the entire post-dot-com bust. Put simply, investors bailed on the market at exactly the wrong time.

It's still scary
Don't get me wrong -- some of the financial headlines we've seen over the past few months are downright frightening. But it's important to not join the panic and to keep a long-term perspective on market panics, booms, crises, and everything in between. In this market, that means you should keep investing, and make sure you're diversified.

At our Motley Fool Stock Advisor investing service, Fool co-founders Tom and David Gardner had a lot of success picking up great companies during the post-dot-com bust. Their long-term focus helped them add names like Amazon.com at a time when the market wanted nothing to do with them -- and their picks are subsequently beating the market by 30 percentage points on average.

They're taking a similar approach now, and count top brand names such as Starbucks among their "best buys" right now. To see what else they're recommending, take a free, 30-day trial. Click here to get started -- there's no obligation to subscribe.

This article was originally published on Sept. 4, 2008. It has been updated.

Todd Wenning panics at the sight of clowns, but at little else. He does not own shares of any company mentioned. The Fool, on the other hand, owns shares of Starbucks, which is a Stock Advisor and an Inside Value pick. Amazon is a Stock Advisor recommendation. The Fool's disclosure policy keeps a steady hand.
Read/Post Comments (14)

http://www.fool.com/investing/general/the-wall-street-panic-of-2008.aspx

Recent tulmultuous events provided great opportunity

How to keep your head when people all around you are losing theirs...

Morningstar FundInvestor:
Your roadmap to the best funds to buy, sell, and watch.

Dear Investor,

It's no secret that this is a frightening market. Watching the devastating effects of the financial meltdown and widespread panic scare me, too. But I also think the tumultuous events have provided savvy investors with a great opportunity.

As unnerving as recent events have been, history has shown us that the economy will bounce back, and that means the market will too. Ten years from now, 20 years from now, people will look back at this time and wish that they had invested more. See how Morningstar FundInvestor can provide you ways to add breadth to your portfolio. Review the current issue for one month at no charge. If you like what you read, continue your subscription and benefit from 11 more months of hard-hitting analysis and research. If not, cancel before the 30 days is up and your credit card will not be charged.

The Morningstar Difference

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To take advantage of low fund prices, you need great fundamental research, a long-term focus, and a game plan. At Morningstar, we sort through performance data, expenses, trading costs, and more to give you unvarnished recommendations on the top 500 funds that should be on your radar. Plus, with our targeted 150 Analyst Picks, we'll tell you what funds make the best long-term investments, and we watch them closely to make sure they continue to merit our recommendations.

I'll guide you to the best managers--those who invest more than one million dollars in the fund they manage--and steer you away from the over hyped managers. I will also provide insights into companies that are a good steward of your funds and name names of those that are not.

So tune out the panicky doomsayers on television and invest in some of the best funds around. Don't throw up your hands and give up on investing. With the downturn in the market, there are more funds available than ever before.

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Morningstar FundInvestor

http://www.morningstar.com/Products/Store_FundInvestor.html

Your Once-in-a-Lifetime Investing Opportunity

Your Once-in-a-Lifetime Investing Opportunity
By Chuck Saletta

December 3, 2008


"Panic" might be too weak a word for what's going on out there. It's not just that the stock market has been affected -- the far larger lending market has seized up as well. Banks don't want to lend to each other, much less those of us out here in the real world, and the bond markets remain off-limits to all but the strongest of borrowers.


And all of that is leaving everyone terrified. The long-term future simply doesn't matter all that much to a company that risks oblivion in the next week if it can't roll over its maturing debt or cover tomorrow's margin call.


The companies hit hardest by this mess have been the ones that were built on the presumption of easy, cheap, and unlimited credit. Homebuilders like Centex (NYSE: CTX) are in a world of hurt, and even the strongest automobile titans like Toyota (NYSE: TM) are feeling the impact of the credit crunch. But it was investment banks and financial institutions -- the largest and fiercest players on Wall Street -- that were literally ground zero for this implosion.


The list of companies brought down by the implosion -- Bear Stearns, Lehman Brothers, Fannie Mae, Freddie Mac -- includes some of the most notable names on Wall Street. The list of companies struggling to survive the economic downturn grows longer by the day. And that's creating a once-in-a-lifetime investing opportunity -- for you.


It's your turn There are unbelievable bargains available now, the likes of which we haven't seen since the days of Benjamin Graham. Under less unusual circumstances, Wall Street's financial wizards would be leveraging themselves to the hilt to take advantage of the market's current conditions. But with their funds cut off, redeemed, or diverted into mere survival, they're forced to sit on the sidelines, rendered completely unable to act.
That's where you come in. As long as you have the patience to wait out the volatility, you can buy those very same bargains (without the leverage) and be richly rewarded when things return to normal.


The country, the stock market, and the strongest companies of the era survived the Great Depression. We'll get through this mess, too. Much the way Benjamin Graham and his protege Warren Buffett did after past catastrophes, the superinvestors of this generation will make their fortunes buying on the heels of this one.


Where to play



Even if you don't aspire to be the next Graham or Buffett (and don't have $5 billion sitting around with which to invest in a struggling company), there are plenty of bargains available to you right now.


But be careful out there -- not every company that has fallen is legitimately cheap. We're in the throes of a global economic rout, after all, and many companies deserve their slashed share prices.


Those whose prices have dropped as a result of forced selling or general market malaise, on the other hand, are the most likely to reward their shareholders for holding on through this mess.

They typically have

• Strong balance sheets,


• Reasonable or cheap valuations, and


• Moats protecting their core businesses.
  

Companies like these, for instance:
Company/Moat/Value proposition
Wal-Mart
(NYSE: WMT)
Unparalleled supply chain.Scale to leverage best prices.
Trailing P/E below 16;$5.9 billion in cash on hand.
Microsoft
(Nasdaq: MSFT)
So dominant, it's routinely classified as a monopoly.Nobody likes Vista, but they're buying it anyway.
Trailing P/E below 11;$19.7 billion in cash on hand.
Altria
(NYSE: MO)
In spite of knowing better, people still smoke.Government-enforced market-share protection thanks to master settlement agreement.
Forward P/E around 9;more cash on hand than total debt.
Oracle
(Nasdaq: ORCL)
Dominant position in database market gives it leverage in related business software categories.
Trailing P/E below 15;more cash on hand than total debt.
Verizon
(NYSE: VZ)
Captive markets for line-based phone services.Already built-out cellular network.
Trailing P/E below 15;total debt less than 1/2 of revenue.

Although these companies are likely to be affected by the U.S.'s newly declared year-old recession and the general tightening of consumer credit, their basic businesses are solid. Solid businesses, clean balance sheets, and cheap prices compared to intrinsic value mean these are the types of opportunities you should be taking advantage of right now -- while you still can.

This won't last forever

In ordinary times, companies this strong would not be available at such attractive prices. These deals are available only because the global financial meltdown has knocked out so very many of the institutional investors who would ordinarily bid these companies up much higher.

If you want to pay bargain-basement prices for some of the strongest businesses around, this is when you should pounce. It's not easy to buy when everyone is panicking, but it's precisely how generations of successful value investors have made their fortunes.

At Motley Fool Inside Value, we're taking advantage of the brief window we've been given -- and we're excited to buy companies like these at such reasonable prices. You can get a free, 30-day trial, with all of our recommendations but no obligation to subscribe, just by clicking here.
At the time of publication, Fool contributor and Inside Value team member Chuck Saletta owned shares of Microsoft. Wal-Mart and Microsoft are Motley Fool Inside Value selections. The Fool's disclosure policy knows the corporate American Express number but isn't telling.

http://www.fool.com/investing/value/2008/12/03/your-once-in-a-lifetime-investing-opportunity.aspx



Also read:

http://financialfellow.com/2008/11/24/yet-another-reason-to-start-saving-for-retirement-early/

Weathering a Panic

When you are caught in a market panic, the bottom-line reality question is whether capitalism in the United States and other major Western nations 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 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.

-------

When appropriate selling has left an investor with only a few, high-quality stocks, he can and should hold onto those gems and play through the difficult experience of a panic or crash. He will be holding only a relatively small portfolio, so his level of pain will be no worse than moderate.

His cash holdings will give emotional comfort and provide the resources for acquiring stocks advantageously when prices get really low and buying feels scary.

A comforting perspective for those less than 50% committed to stocks is that each decline means their cash is gaining stock-buying power faster than their remaining holdings are losing cash value! Think about that.

------

Once the panic subsides, there is a lift in the market. But its effect is significantly different across various kinds of stocks. For some issues, there is a sharp snap=back rally; for others, very little improvement.

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

------

Decide in real time, 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 is no need to sell to raise cash for margin calls or for new buying.

But because the goal is always to maximize return on capital and to take advantage of the time value of money, look closely at what to hold and what to sell now that the panic's dust has cleared.

One must look forward at future prospects rather than backward at now-irrelevant old (higher) prices.

Some investors may see a contradiction in the advice to hold the remaining few gems through the worst psychological heat, because earlier they were counseled that avoid losses is the first priority and the best reason for selling.

But taking a limited short-term dose of paper losses in a crash - by holding a few items of real quality - is a lesser risk than selling out during the fury and hoping to have the courage and good timing to get back in at lower prices shortly afterward.

------

Ref: It's when you sell that counts, by Donald Cassidy

The Bad News that creates a Buying Situation - Stock Market Corrections and Panics

Stock market corrections and panics are easy to spot and usually the safest because they don't tend to change the earnings of the underlying business. That is, unless the company is somehow tied to the investment business, in which case a market downturn tends to reduce general market trading activity, which means brokerage firms and investment banks lose money. Otherwise the underlying economics of most businesses stay the same. During stock market corrections and panics, stock prices drop for reasons having nothing to do with the underlyng economics of their respective companies.

This is the easiest kind of situation to invest in because there is no real business problem for the company to overcome. If you let the price of the security, as Buffett does, determine whether or not the investment gets bought, then this is possibly the safest "buy" situation there is. Buffett began buying The Washington Post during the stock market crash of '73 - '74 and Coca-Cola during the crash of '87. While everyone else was caught in a state of panic, Buffett began buying these companies' shares like a man possessed with a deep thirst for value. He eventually acquired 1,727,765 shares of The Washington Post and 200,000,000 shares of Coca-Cola.

A market correction or panic will more than likely drive all stock prices down, but it will really hammer those that have recently announced bad news, like a recent decline in earnings. Remember, a market panic accents the effect that bad news has on stock price. Buffett believes that the perfect buying situation can be created when there is a stock market panic coupled with bad news about the company.

Any company with a strong consumer monopoly will eventually recover after a market correction or panic. But beware: In a really high market, in which stock prices are trading in excess of fourty times earnings, it may take a considerable amount of time for things to recover after a major correction or panic. Companies of the commodity type may never again see their bull market highs, which means investors can suffer a very real and permanent loss of capital.

After a market correction or panic, stock prices of the consumer monopoly type company will usually rebound withn a year or two. This bounce effect will often provide an investor an opportunity to pick up a great price on an exception business and see a dramatic profit within a year or two of purchasing the stock. Stock market corrections and panics have made Buffett a very happy and a very rich man.