Should You Pounce on Panic-Sold Stocks?

We've told you not to panic. But for many investors, it's too late -- they already did.

If you think professional investors are scared -- and they are -- just look at average folks watching their 401(k)s go up in smoke. From looking at money flows in and out of ordinary mutual funds, there's a lot of fear among individual investors. And although up-to-the-minute figures for fund purchases and redemptions aren't available, the news thus far is disturbing:

  • Stock-fund investors took out $19.5 billion in August, following a $27.4 billion outflow in July.
  • Investors pulled $24 billion from emerging-market funds during the third quarter.
  • Just last week, fund shareholders cashed out a record $65 billion from their mutual funds, two-thirds of which came from stock funds.
  • Bond funds have also seen big redemptions, with losses of $28.5 billion for October as of last Friday.

In light of Monday's huge recovery, all of that selling last week is terrible news -- although the future could easily prove panic-sellers correct if that big jump proves to be just a temporary relief from further declines.

Nevertheless, if you still believe the stock market is a good place to invest, then all of that panic-selling is good news for you. It's making share prices cheap, and especially since mutual funds tend to hold huge numbers of securities, the selling pressure that results from shareholder redemptions typically forces funds to dump lots of stock onto the market. That spells opportunity for bottom-fishing investors with cash to spend.

Shooting fish in a barrel
Amid all of the selling, some savvy buyers got in on the action on Friday and bought shares of companies that were getting beaten down. One way you can gauge buyer interest is to look at money flows -- the size of trades that occur after incremental share-price rises, also known as upticks, versus trades following incremental price drops, or downticks. By tracking all of the individual trades throughout the day, you can see where investors were putting their money.

Even on Friday, many stocks had strong incoming money flows. Here are stocks with particularly high money flows, according to The Wall Street Journal:

Stock

% Change Friday

Total Money Flow (Millions)

Chevron (NYSE: CVX  )

(9.6%)

41.5

XTO Energy (NYSE: XTO  )

(12.9%)

40.2

UPS (NYSE: UPS  )

(2.5%)

32.2

Newmont Mining (NYSE: NEM  )

(14%)

10.8

Pfizer (NYSE: PFE  )

(3.4%)

26.0

PepsiCo (NYSE: PEP  )

(2.9%)

25.5

Abercrombie & Fitch (NYSE: ANF  )

(1.5%)

20.4

Source: The Wall Street Journal.

Pummeled oil and natural-resources stocks dominate the list. But investors picked up bargains in industries that span the entire economy.

The flip side of that figure, however, is that money flows don't tell you whether a particular trade is a long-term investment or a short-term play. On Monday, for instance, during the Dow's record point rise, many oil and commodities stocks had negative money flows -- a suggestion that investor interest was short-lived.

Ignore the short run
It's always nice to buy at what proves to be the ultimate bottom, as Friday's buyers may have succeeded in doing. Yet even if you missed out on Friday's big bargains, don't obsess too much about the short term. Even if you don't invest a single penny more in the market now, you're doing much better than a lot of Main Street investors who panicked themselves out of the market after its big drop.

Regardless of the current volatility, fundamentals will eventually reassert their dominance over stock prices. If you buy shares of good companies that have gotten beaten down, then you should do well over the long run. On the other hand, if you grab any bargain you can find regardless of its future prospects, then you're gambling with your life savings -- and you could easily see further losses.

As you gain experience as an investor, you'll learn more about how to take advantage of weaker players in the market. It doesn't matter whether you're benefiting from scared individual investors or liquidity-squeezed hedge-fund managers. Any time herds of people are rushing for exits, you should be bucking the trend and trying to figure out the best way to get in.

For more on the panic of 2008:

What now? The Motley Fool is here to answer your questions about this financial crisis. Send us an email at AsktheFool@fool.com, and check back at Fool.com as we answer your questions and cover the latest on the Panic of 2008.

When stocks drop, don't sell -- buy! To learn how to pick up shares of great companies when their stocks are low, you'll want to read the latest issue of Motley Fool Inside Value. Each month, you get in-depth analysis of great value stocks, along with tips on how to avoid value traps. Best of all, the service itself is a value -- absolutely free with a 30-day trial.

Fool contributor Dan Caplinger uses every trick in the book to try to value stocks -- not always successfully. He doesn't own shares of the companies mentioned in this article. United Parcel Service and Pfizer are Motley Fool Income Investor selections. Pfizer is an Inside Value pick. The Fool owns shares of Pfizer. Try any of our Foolish newsletter services free for 30 days. The Fool's disclosure policy won't sell you short.


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  • Report this Comment On October 15, 2008, at 8:33 PM, kappermi wrote:

    I guess you forgot about me and many other investers whose only income is from our IRA's. Mine was in three tiers 5>6> then 7 years then SS(social security) Finally I did go to cash 5 days ago and and have a safe income for the next 2 1/2 years. But our vacations and other play money has dissapeard for the time being unless the market comes back to 11k in the next 4 years or so. Where were all the advisors telling us to get out of the market 7 months ago?

  • Report this Comment On October 16, 2008, at 10:47 AM, tbuzzGT wrote:

    Mr. Kappermi:

    Your advisor may have been the same place ours was - unavailable and not wanting to sell. 3 times our ML "Advisor" talked us out of selling - the next time he was on vacation & I transferred the account since I was always going to be the one responsible for the loss and they were going to be responsible for the gain. The investor is almost always "responsible", but when you pay for reasonable advice, you expect it - we did and it did not happen. The only advice we got was bad for 4 years. Of course hindsight is wonderful - everyone has it. Fortunately, we did not give them access to all of the money or it would have taken a large hit also. Not all advisors are bad, but much of the advice is bad and benefits them more than you. I know several others who are as honest as they come. My risk tolerance is not high, but on the + side of conservative. I have invested in good dividend stocks for 30 years, but they thought we should "diversify" more. We did and lost. The conservative + funds they sold us, were anything but that. They were loaded with mortgage backed securities (up to 45% i one) that were over rated by appraisers, the lenders, packaged resold and repackaged and resold again. Far from our conservative + lifestyle. The stock market today is probably valued at what it is worth. AIG has wasted billions and spent 500k or more rewarding its executives after they got the bailout from the US Gov't. Return of performance bonuses to stockholders or prosecution of executive and revocation of licenses should be mandatory. The Risk tolerance levels (explanations) set forth by the investment houses are written to their advantage, not the investor's advantage. Oh, you mean you have exceeded your risk tolerance level? That happened when we were invested in conservative junk bonds and real estate. Like you and many other hard working people who have saved for retirement, our future has been altered by greedy, blood sucking salesmen and politicians. And once again, not all are in this category. As for Presidential candidates, I have already voted (only once for me !), but I am not happy with the offerings. Neither party will do the right thing and both got us here. It started with our fellow Georgian Jimmy Carter and has continued with every administration. Redistribution of wealth . . . it has already happened. Unless our governments balance the budget and cut expenses, there is no hope. The rest is all bull. There is a place in hell for many of these people - fortunately, I will not be the judge. In speaking with my parents' generation, I agree that this is not like the depression of '29. They lived pretty good. Grew up on a farm, had plenty of good food, bartered for what they did not have, and spent $5-10 per week on the rest. I can only grow azaleas and grass in my yard - no food. Without electricity, our grocery store food spoils, there will be no water. But those who were rewarded with Millions and Millions of $'s, will be living pretty good - until those who don't have anything left redistribute their wealth. I might by a car or house or something else, but they will have to drop by the same amount as my conservative + funds have dropped. Now I feel better, until the funds unload their stocks to pay for todays margin calls. Performance bonuses should never be paid on this year's goals. Management almost always achieves goals once they set them and know what they are. Bonuses should be set aside until it can be proven that the right goals were set and achieved.

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