Some Investors Really Should Panic

The Dow's triple-digit drop shouldn't have shocked anybody who's been paying attention to the economy we all actually live in, as opposed to the statistics-ridden, often questionably interpreted version we hear about on TV and Internet news.

Economic weakness has continued, yet the market's recent oblivious ascent seemed to tell a different story about what was happening in America. Apparently many people hadn't noticed, or simply hadn't made any correlation to how negative factors would affect many businesses' actual financial standing.

Given signs that the U.S. economy and global outlook are still a far cry from healthy, some investors should panic. These would be the traders who treat the stock market like a casino and put little thought into the businesses they're buying.

Less bad isn't good
Even with the unemployment rate recently dropping below 8%, we're not out of the woods yet. "Less bad" definitely isn't a synonym for "good."

Corporations are still handing out pink slips at a pretty disturbingly regular pace. DuPont (NYSE: DD  ) is the latest, announcing plans to cut 1,500 workers, but look at Bank of America (NYSE: BAC  ) , which aims to let go of 16,000 employees by the end of this year. 

The housing situation has continued to leave many consumers feeling a lot less flush than during the bubbly years, and the midwest drought is causing spikes in the cost of many staples like milk and meat. Higher gas prices also pinched consumers' pocketbooks in September. 

When many consumers are already struggling to make ends meet for various reasons, such negative headwinds don't improve the outlook for them or, later down the line, many corporations' results and shareholder returns.

It shouldn't shock anyone that top-line sales figures are leaving something to be desired this earnings season. Maybe it's sinking in that across-the-board euphoria wasn't grounded in economic reality.

No brain cells were harmed (or even involved) in this investment thesis
I'm usually the first to advise investors not to panic. However, that doesn't apply to speculative market players who think investing involves riding idiot rallies to quickie, no-brainer gains. In other words, few or no brain cells were utilized when thoughtless investments in ticker symbols are the equivalent of "get rich quick" schemes.

Another pocket of investors who should consider panicking are the ones who bought up shares of beleaguered companies they misinterpreted as "cheap." Many of these folks probably missed the point that much of the time, such stocks are cheap for a very, very good reason, especially when the economy's in fragile condition.

Anyone who spun the wheel on RadioShack (NYSE: RSH  ) should be rethinking the wisdom of having bought in right about now. If Best Buy's (NYSE: BBY  ) in dire straits, how on earth is RadioShack going to improve its competitive standing?

Consider Bon-Ton Stores (Nasdaq: BONT  ) , which was recently bid into the sky on turnaround pipe dreams. Some investors apparently overlooked concerns such as its overly indebted status and the fact that it resides in the highly competitive department store space.

Or what about Splunk (Nasdaq: SPLK  ) , which went public in April and had quite a run for a while, probably related to its relationship with the trendy term "big data." Splunk may sound exotic, but it isn't even profitable yet.

Anybody who thought Zynga's (Nasdaq: ZNGA  ) descent into penny-stock territory made it a "cheap" stock to buy was playing a most dangerous game. No one should have bet the Farmville on a stock that relied so heavily on social media users' fickle tastes and habits in a realm where tons of activities constantly vie for people's limited attention.

Avoid the panic-button play
Regardless of the broader market's bipolar mood swings, investors who are buying stakes in high-quality businesses they understand don't have to sweat the short-term volatility. Bearish markets yield real opportunities for true long-term investors with cool heads and plenty of patience.

Many high-quality companies' stock prices are drifting away from their recent highs, becoming far more interesting stock ideas for those who are looking for better entry points for long-term shareholding.

Take Costco (Nasdaq: COST  ) , which has been dragged down with everybody else; there's no indication anything has changed in its core business, which can withstand tough economic times thanks to its discounter status. Such logic disconnects make major stock market bargains.

The only investors who should be worried are the ones who aren't seeking to put their money into the best businesses, and who lack the patience to buy and hold for long periods of time.

So go ahead and push that panic button! In all seriousness, though, hopefully more investors will realize that once the shoddy stocks are dumped, there's plenty of room for high-quality replacements for a truly long-term portfolio that will persevere through ups and downs. No panic buttons necessary.

The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward looking and capable companies will survive, and they'll handsomely reward those investors that understand the landscape. You can read about the 3 Companies Ready to Rule Retail in our premium research report. Uncovering these top picks is free today, just click here to read more.

Alyce Lomax has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America, Best Buy, Costco Wholesale, and RadioShack and is short RadioShack. Motley Fool newsletter services recommend Best Buy and Costco Wholesale. Try any of our Foolish newsletter services free for 30 days.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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