If You're About to Panic, Read This First

Welcome to Panic 2008. I'm finding it useful to think of this as a bank run -- much of the world has its savings in stocks and bonds, and just as in a bank run, when depositors lose faith in the underlying institution, out go the deposits.

This isn't to trivialize the problems in the global credit markets -- although we see panic there too, albeit of a slightly different sort -- or in the world's economy. Those are real, and extremely serious, but they are not in and of themselves the drivers of the extremely broad-based panic selling we've seen in recent days.

As New York Times columnist Paul Krugman said, people are selling because the prices are going down. At some level, it really is that simple.

People are selling -- bailing out of hedge funds and mutual funds -- because they've lost confidence in the idea that the stock market will go back up. The funds in turn are selling their holdings to cover those redemptions. And because those holdings are, in aggregate, drawn from every corner of the market, every corner of the market is getting clobbered.

This happens in bear markets. When enough people become fearful, lose faith, and sell, it's called capitulation. Capitulation is generally followed by the bottom -- the low point, the end, the quiet moment after the anvil has landed on top of Wile E. Coyote and the dust cloud is drifting in the wind.

And by definition, the bottom is followed -- sooner or later -- by stock prices going up. The money on the sidelines reenters the stock markets looking for bargains. Prices start rising, and people start buying when prices are rising. It may take a few rounds of false starts before enough people really trust the trend, but eventually things get going.

Remember what I said about bank runs and losing faith in "the institution"? My sense here, on Friday afternoon, is that the institution people have lost faith in is "the market," rather than the individual companies whose stock they're selling.

There are exceptions, of course -- General Motors (NYSE: GM  ) , one of the hardest-hit stocks yesterday, is genuinely in grave trouble right now -- but have the fortunes of McDonald's (NYSE: MCD  ) or Walgreen (NYSE: WAG  ) really deteriorated 15% or 20% in the last week?

I don't think so. I think those are panic discounts. And unlike with a bank run, the market isn't in real danger of going out of business.

Our challenge, today and in coming days, will be to find more companies like McDonald's and Walgreen.

Wait. How can you talk about buying stock at a time like this?
Here are some things I believe as of this moment. To be clear, I'm thinking of this as a long-term investor, someone who invests mainly for retirement, someone for whom retirement is probably 30 years away. Your mileage may vary.

  • Total global collapse is not in the cards. Yes, I read Nouriel Roubini and other experts who have made dire predictions every day. Yes, I take them seriously. But I continue to think that global governments will get this figured out and credit markets will start to ease before truly awful consequences take hold. We're in for a recession, not anarchy.
  • The market won't go to zero. See above.
  • The bottom is near. That doesn't mean that the recovery is near, only that we'll be through the worst of the selling before too long. In fact, we may be through the worst of it now.
  • It's too late to sell. You can read why here. Briefly, even though we may not be at the absolute bottom, and even though it may take years for the S&P 500 to hit new record highs, stocks are likely to be above these levels relatively early in the recovery. There's nothing much to be gained by selling at this late date, and there's a lot to be lost.
  • Five or ten years from now, prices will be a lot higher. Not all prices, of course -- some businesses will merge or fail or be substantially crippled by the recession. But I think the best firms, the long-term holds, the great old-line companies like Johnson & Johnson (NYSE: JNJ  ) and the resource giants like Alcoa (NYSE: AA  ) and the top retailers from Amazon.com (Nasdaq: AMZN  ) to Wal-Mart (NYSE: WMT  ) will almost certainly weather this storm and emerge in a very strong position.

And right now, those companies are on one heck of a sale, as are lots of others. But where are the very best values right now? The Fool's Inside Value team knows, and they're letting readers know with solid recommendations for new investments in the midst of the market's chaos, backed with up-to-the-minute commentary and discussion. You can read it all and join right in for free (how's that for recession pricing?) with a 30-day trial.

Fool contributor John Rosevear owns shares of General Motors, but not too many. He has no position in the other companies mentioned. Johnson & Johnson is a Motley Fool Income Investor selection. Wal-Mart is a Motley Fool Inside Value pick. Amazon.com is a Motley Fool Stock Advisor recommendation. Try any of our Foolish newsletters free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (9) | Recommend This Article (28)

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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 10, 2008, at 1:29 PM, SteveTheInvestor wrote:

    Yup, every day somebody says that the worst is over, and every day my stocks drop between 5 and 20%. Yeah..... right.

  • Report this Comment On October 10, 2008, at 1:33 PM, mkrigg86 wrote:

    Great article! I still love Alcoa, time to get them cheap!

  • Report this Comment On October 10, 2008, at 1:41 PM, Madcapped wrote:

    Everyone keeps calling this a "panic." However, it seems like it is being driven by professional investors rather than retail investors. It certainly doesn't seem irrational to me that people have no idea what financial institutions are going to be worth going forward since many insurance companies and banks made a great deal of money with complex instruments and fee income that won't be there in the future.

  • Report this Comment On October 10, 2008, at 1:43 PM, TMFMarlowe wrote:

    Steve, I didn't say it was over. I don't think it's over. I do think it has progressed far enough that shifting to a bargain-hunting mode and making up a shopping list is a good thing to be doing, even if you decide to wait until you see an upward trend established before actually making the trades.

    John

  • Report this Comment On October 10, 2008, at 2:11 PM, macrophyllum wrote:

    I liquidated everything in one account 2 weeks ago, I'm glad I did that! Today I liquidated every stock I own that was "in the green", got to take a profit at some point. (Note, it was only like 4 stocks, AAPL, AMZN, ORCL and Intuitive Surgical, ones that I bought into years ago). I'm holding everything that is already in the red in hopes that it will come back some day. But I'm also prepared that it might not, the Federal Reserve has been driving our economy into the ground since we really started embracing fractional reserve banking. I'm preparing for the worst, that the market may go almost to zero. Prepare for the global economic breakdown, buy gold!

  • Report this Comment On October 10, 2008, at 6:14 PM, frankhinde wrote:

    5 to 10 years from now the S&P will hit new highs? There is a pundit from CNBC today that says we could be beow the peak of last year for between 16 and 30 years based on history. While I agree this is the time to buy quality companies I'm wondering if the 80K I've already lost on paper will come back before I retire in my 20 year timefreme...Your comments please?

  • Report this Comment On October 11, 2008, at 12:03 AM, TMFMarlowe wrote:

    Frank, I can't predict the future with complete certainty, but I'm betting on the scenario I've outlined above. (Note I didn't say "new highs", though -- I said I thought prices would be "a lot higher" than they are today.) My portfolio is about 85% in stocks as of this moment and every dollar of that is long. Ask the CNBC pundit if his money is where his mouth is -- or if he's just blowing hysterics to raise the ratings.

    John

  • Report this Comment On October 12, 2008, at 2:05 PM, apackalyes wrote:

    Call me an idiot, but I remain skeptical that the value of companies like Intel or Monsanto (or any of a number of blue chips) have suddenly taken some catastrophic, irremediable hit. What... there's going to be a permanent loss of customers for their products? People aren't going to grow food, or want to do it efficiently? Use computers?

    This is a recession, yes. The end of the world? No.

    For better or worse, we live in a media age where hyperbole is the coin of the realm. I wish they would behave more responsibly, but I guess I'll have to add that to the long list of things I'm not going to see anytime soon. Same goes with politicians.

    I just think the notion that prosperity is "gone forever!!!!" is way, way overblown.

  • Report this Comment On October 12, 2008, at 4:13 PM, thomasflurkey wrote:

    thank you Apackalyes. I totally agree. This is a structural problem. the underlying economies are stagnant or slightly contracting, not disappearing.

    This is the great stock market buying opportunity of all time!

    Let the middle class and the aged sell at the market bottom and lock themselves into a lifetime of poverty. Not me . . .

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