No doubt, many investors regard the current market freefall as the worst financial experience of their lifetime. Almost daily, reports are circulating with stories of IRA or 401(k) plans that have shed 30%, 40%, or more of their value.
But if history is any guide, five, 10, or 15 years from now, what many are calling a market meltdown of historic proportions will turn out to have been a boon for some investors. Considering a recessionary economy a good thing may sound ludicrous, but this scary period may be the best thing that has ever happened to you -- if you choose to take advantage of The Wall Street Panic of 2008.
In the grip of fear
While a nominal level of fear is a necessary component of markets because it helps us avoid mistakes, outright panic can be devastating. A behavioral finance professor at Santa Clara University has even studied how panic creates a vicious cycle of irrational behavior. In his 2000 paper, Hersh Shefrin points out how panicked investors misread events, taking small threats as catastrophes that spur them to action. The end result? Investors sell out of valuable companies at low prices on an inflated sense of fear and uncertainty.
And it's not just individuals -- so-called professional investors are subject to self-defeating survival instincts as well. Meltdowns at firms like Lehman, AIG, and Wachovia (NYSE: WB) have money managers spooked.
As a result, many bellwether companies that were once considered stable investments, such as UnitedHealth Group (NYSE: UNH) and Intel (Nasdaq: INTC), have recently lost tens of billions of dollars in market value.
Everyone is stressed, but the masters still buy
To blunt the negative impact of panic-induced actions and turn a bad thing (the crumbling economy) into a good thing (market-beating returns), you must keep investing. If you remember the old adage to buy low and sell high, your chances of coming out ahead in the future are far better.
You only need to look at some prescient and wealthy investors that have done this many times before. Warren Buffett recently acquired Constellation Energy for $4.7 billion and has spent billions buying shares of Kraft (NYSE: KFT) or doing deals with General Electric (NYSE: GE) and Goldman Sachs (NYSE: GS). Bill Ackman's Pershing Square Capital Management recently bought a 2% stake in beaten-down EMC (NYSE: EMC), 9% of Longs Drug Stores, and 12% of Wendy's Arby's.
Other opportunistic money managers such as Jeremy Grantham, Chris Orndorff, and Bob Doll are taking advantage of pessimism and buying what they see as dramatically undervalued companies, too. These top investors aren't buying shares because they see low risk -- they do it because they see tremendous potential upside in spite of the risks. Legendary investor Shelby Davis put it best when he said "You make most of your money in a bear market. You just don't realize it at the time."
It's happened before
Motley Fool Stock Advisor
's record stands as a great example of how the strategy of buying into fear can make you rich. The investing service started at what many thought was an awful time -- following the dot-com implosion in 2002 -- and many of the initial companies recommended plummeted after being recommended to investors.
But today, despite the recent market drubbing, 18 of the 24 stocks picked in the first year are (or were sold) in positive territory, and seven of these have more than doubled in value. To see how buying great stocks at cheap prices can put you ahead, check out a free 30-day trial of the service.
Fool contributor Dave Mock frequents his "happy place" to help deal with market anxiety. He owns shares of Intel. UnitedHealth Group and Intel are Inside Value recommendations. UnitedHealth Group is also a Stock Advisor pick. Kraft is an Income Investor selection. The Motley Fool owns shares of UnitedHealth Group and Intel and owns covered calls on Intel. The Fool's disclosure policy is working on that .220 batting average.
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