Is It Too Late to Sell?

If you expected the bailout to bail you out, you've gotten the disappointment of a lifetime. After what seems like constant drops in the market, even die-hard stock investors want to cry uncle.

The S&P 500 has dropped 18% in just seven trading sessions. The Dow sliced through 10,000 as though it wasn't even there, and has lost more than 15%. The Nasdaq? Off more than 20%. In just a week and a half.

If you didn't think stocks were risky before, you certainly know better now. Is it time to get off the ride before things get even worse?

What history really says
You've already heard all the basic talk about how historically, big market plunges are a great time to buy. That's easy to say looking back, but a lot harder to believe when you're in the middle of a plunge. So let's take a closer look at some similar periods in the past 20 years or so when stocks fell sharply:

Dates of Drop

% Drop on S&P 500

% Change After 6 Months

7/12-7/23/2002

(13.4%)

11.2%

9/5-9/21/2001

(14.7%)

19.5%

4/3-4/14/2000

(9.9%)

2.2%

8/26-9/4/1998

(10.1%)

28%

8/15-8/23/1990

(9.7%)

19.2%

10/5-10/19/1987

(31.4%)

14.7%

Source: Yahoo! Finance.

Note that in terms of short-term drops, the past two weeks have been extraordinary -- only the 1987 crash exceeds the speed of the declines we've seen. Also, it's reassuring to see that after big drops, the market tended to do reasonably well in the near future. That even includes drops early in the bear market of 2000-02, when those short-term gains would later give way to further declines before hitting bottom in late 2002.

Digging deeper
So history says buying stocks after a huge drop has usually been a smart move. But which stocks should you buy? Are the companies that have gotten beaten down the most the same ones that will recover the most? Or should you look elsewhere?

To answer those questions, let's look more closely at the latest three recoveries from big drops. Since technology was the focus of the 2000-02 bear market, let's look at how much some big-name tech stocks recovered after those drops, compared to stocks in other sectors:

Stock

6-Month Return After 4/14/2000

6-Month Return After 9/21/2001

6-Month Return After 7/23/2002

Microsoft (Nasdaq: MSFT  )

(27.5%)

23.5%

21.6%

Intel (Nasdaq: INTC  )

(26.9%)

62.9%

(6.2%)

Cisco Systems (Nasdaq: CSCO  )

(1.6%)

36.4%

16.7%

General Electric (NYSE: GE  )

17.9%

21.3%

(2%)

Procter & Gamble (NYSE: PG  )

16.5%

36.3%

8.9%

Dow Chemical (NYSE: DOW  )

(31.2%)

13.5%

18.9%

Wal-Mart (NYSE: WMT  )

(18%)

39.6%

8%

Source: Yahoo! Finance.

In general, there's no obvious difference in how high-quality tech stocks did versus a sampling of blue chips from other sectors. In late 2001, after the decline following 9/11 that affected stocks across the board, stocks generally rebounded fairly evenly. Similarly, most shares bounced back after the July 2002 swoon. Only in early 2000 was there a distinction drawn between tech stocks and more defensive sectors, although even then, not every stock participated in the recovery.

Should you sell anything?
If it were still early in this bear market, it might not be too late to sell the hardest-hit stocks -- in this case, financials -- despite substantial drops. You might reasonably decide that the worst is yet to come, and so taking big losses is still better than losing even more by hanging on. Just as selling tech stocks in early 2000 would have saved you some money, selling financials after their initial drops in 2007 and earlier this year could have prevented a lot of damage to your portfolio.

Now, though, the bear market has been around a lot longer. Shares have taken hits across the board, regardless of whether they're financial stocks or not. The situation looks a lot more like 2001 or 2002 than 2000 -- and so it's likely nearly everything will recover when the market rebounds.

So if you've stuck it out this long, it's far too late to sell. Even if the bear market stays with us in the years to come, the odds are good that selling right now after a panic-driven drop will prove to have been a huge mistake.

More on panic in the markets:

Wal-Mart, Microsoft, and Intel are Motley Fool Inside Value recommendations. To learn more about stocks with a margin of safety to hold their value even in tough times, take a look at our value investing newsletter -- it's absolutely free with a 30-day trial.

Fool contributor Dan Caplinger wonders when it's all going to end. He owns shares of GE. Dow Chemical is a Motley Fool Income Investor recommendation. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy is always punctual.


Read/Post Comments (7) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 08, 2008, at 1:11 PM, lemaitre007 wrote:

    I like your general thesis but I'm wondering to what extent the market prospects over the next couple of years make it worthwhile holding my existing stocks in the hope that they will appreciate again any time soon.

    Most analysts seem to be saying that we're in for a long, deep recession. If this is so, declining earnings may not produce any significant improvement in stock prices until 2011. In fact, even after the current panic selling is over, we may still see a gradual deterioration for many months - the death of a thousand cuts.

    In your above comments on the recovery from previous market drops, was the drop followed by the a severe recessionary period such as we're now contemplating? Comments, please.

  • Report this Comment On October 08, 2008, at 2:14 PM, SteveTheInvestor wrote:

    The basic response to crappy markets around here (and some other places) is "don't get scared out of your stock holdings". That doesn't change until of course it is too late to be scared out of stocks, because you've lost more than half your money. Then of course, you spend who knows how many years waiting for a 100% (or more) increase, hoping to get back to even.

    The economy is trashed. We all should have been out of stocks a year ago (or sooner). I managed to sell some of my holdings back then, against the advice of many here. Now of course I wish I had sold more. The housing market isn't even close to fair value yet and still has a ways to drop. Until that happens, the economy will be a problem. There are no visible lights at the end of the tunnel yet. We will get some bounces at whatever point, but serious growth isn't likely for some time.

    We should have heard more on how to insulate portfolios and improve safety. Mostly what we have heard though is that stocks are on sale, only to watch someone else pay a third less than you did.

  • Report this Comment On October 09, 2008, at 8:00 PM, cliffyworld wrote:

    Please read the article titled "It's Not Always The Pork. The Cows All Have To Be Fed Too" at http://www.cliffyworld.com/blogs

  • Report this Comment On October 09, 2008, at 11:08 PM, paraguy12 wrote:

    I dont know about U but I will be buying Friday just as they hit record lows. I have been waiting and hoping for a crash like this. This is where one can make a bundle on this OVER< OVER over Over sold market its BLACK FRIDAY muhahahahhaha...the sky is falling. Step right up folks and sell me your Blue chips for pennies on the dollar. I will be saying thanks as soon as next year.

  • Report this Comment On October 09, 2008, at 11:08 PM, paraguy12 wrote:

    Or not......

  • Report this Comment On October 10, 2008, at 12:59 AM, denniswolz wrote:

    10/01/08

    Do you want to make a difference?

    If you do, read the following and send it to at least 8 people. Also send a copy to anyone in Government that you know and let them know what you are going to do on Nov 4th. Within a few days everyone will have read the following and hopefully buckle down and have faith that within a few years you and I will be better off than the rich greedy bastards that now run your government and businesses. Bring main street back to life!

    What is going on now is very good for Main Street.

    Oil came down again today. Corn, Cattle, Soybeans, everything except gold is down today. This has to happen, now or next week or next month.

    Until Commodities match wages we are simply living in a false economy and it cannot continue forever. No way, now how. In the last 10 years wages have hardly risen for the 95% of the working public, adjusted for the devalued dollar wages actually fell. Commodities have risen as much as 10 times in that period (oil from $10 to $150). Wages pay for everything and commodities make up everything, gas, oatmeal, eggs, houses, you name it, what you buy is a commodity. Their price has to be relative to wages or you have to buy less.

    Our government, your banker, your talking heads on the TV and radio talked you into buying a house you couldn’t afford, a car you couldn’t afford, a student loan that you couldn’t afford, a credit card you couldn’t pay down, all to line their greedy pockets. This money was given to you even though it didn’t really exist so that you could drive up commodity prices and line their pockets. It might have made you feel good but it is destroying our way of life.

    Given all this oil needs to be somewhere between $30 and $50 per barrel. In fact if we could get oil to $40 the other commodities will be back to where they were before all of this funny money started flowing 10 years ago.

    How do we get oil prices down? Demand is going to do it sooner or later because the global economy will shrink until that point. We could speed up this drop in price and pump the reserve dry if you had to. Conserve, conserve, conserve, drive only when you have to. Once we get it down the government can keep oil down by buying and selling in the market with the vengeance of a greedy commodities broker who gets rich on the back of others. Another way is to strengthen the dollar, the higher the dollar the lower oil goes. Quit spending on stupid things until you balance the budget.

    Once main street can afford to buy gas and shop for groceries, then and only then will the markets start to function again. Then we can start to talk about fixing the system again. Stocks used to be in the form of certificates, you actually owned a share. If you bought a barrel of oil you took it with you, you actually owned something, you didn’t just trade it to drive the price up or down. When this is all over we need to establish laws that control greed and dishonesty, not laws that line the rich and powerful.

    Get rid of the IRS and go to value added. A rich fat cat buying a 10 million dollar home would pay 1 million dollars in tax to the government at 10 percent. You and I would have to pay the government 30 dollars if we bought a lawnmower for $300, 10 cents for a loaf of bread. A 10 percent tax would more than finance any government worth its salt, do away with the rest. The state would collect the money just like it does the sales tax every month and send it to Washington. Congress could make this happen overnight, but they will not because most of the money will come from the 10 percent at the top who are your congressmen and bankers and greedy CEO’s, your voice will never be heard on this matter.

    Have your government pass a law to cut all government employees by 33%. The waste in our government is criminal, criminal, criminal. By reducing government by a third you would actually speed it up and get out of deficit spending (balance the budget and spend real money again).

    Take interest rates to +-1%. Banks giving you money at 7 or 8 percent when you get less than 1 percent on your savings only builds more and more banks. Banks and your government do not have to be rich fat cats. Banks could lend money at 1 percent over their cost and still get by. The government could lend to the banks at zero, therefore interest rates at 1 percent.

    The cost of money causes inflation. High interest rates are simply passed on to the consumer in the form of price increases thus causing inflation and higher prices. Control the supply of money and you control inflation. Control the deflation of the dollar and you control inflation.

    Lower interest rates and save mortgage holders, a zero principal mortgage would owe how much every month at a zero interest rate, zero. Even the person that is over their head with a $500,000 mortgage would owe less than $900 per month at 2% interest. This would fix most foreclosures and be enough to pay for any work the banker is doing on your behalf. It will not pay his 10 million per year salary but who cares.

    The best way to fix this mess is to form a new Independent party and get rid of Republicans and Democrats. But we don’t have time to do this right now. The next best way to let our government know we are serious about a fix is to remove anyone in office on November 4th. Forget your political allegiance, anyone in government has to understand that we want change. Having all new faces in all units of government from the county rep to the state rep to the federal rep will send a message heard around the world.

    My vote in November is to vote anyone in out, it is a shame that Bush isn’t up for reelection so that I could take him out also. By the way I will be glad to be president, write me in as your candidate for president. I will do the job for free.

    Send this to anyone in government you know and wish them good luck in finding a job come January

    Thanks for your attention to this matter.

    Dennis

    Send me an email and let me know what you think – denniswolz@att.net

    If you send this on mark your email at 512. Whatever number is on your copy times it by 8 and replace that number. This will let everyone know how many people have read and passed it on. We can make a difference.

    8

  • Report this Comment On October 10, 2008, at 9:20 AM, JimmyZangwow wrote:

    "We have to prop up consumption" -Rep. Barney Frank, D-Mass. Nothing signals the start of The Apocalypse quite like hearing That guy say Those words.

    Consumption IS the problem. We shouldn't prop it up. We should let it fall back to more sustainable levels. DJIA at 14000? Get real. I told my bro last month I wouldn't be surprised to see it at half that level by the end of 2008. In fact, I say 5,000 is closer to the truth. Now I hear the knowledgeable crowd saying this MAY impact the holiday shopping season. The Amazing Kreskin lives.

    I got out of the market in September 2007 when I saw 22 foreclosures in our local newspaper. That was, by far, a record number. I couldn't reconcile the profligate house-building, rising oil prices, credit-card frivolity, and the governmental unwillingness to invest in domestic energy production of any practical type, with a sustainable economic future. Listening to the boards on here for the last year with people saying "don't sell, don't sell, this is a perfect time to buy"---well it just seemed like there is a mass cognitive disorder, like people cannot, or refuse to, relate these pieces of information with each other.

    Thanks to all of you who couldn't live without the Venetian marble toekicks in your vacation home's air-conditioned stainless steel backyard grilling cabana, and the dual Hummers next to your teenager's new BMW. Now you'll cry hardship over your $8 coffee and seek government aid (that's code for other people's money) to send your kids to a private school.

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