Fool.com: The Markets Continue to Sink. Should You Panic?[Fool on the Hill] May 24, 2000

FOOL ON THE HILL
An Investment Opinion

The Markets Continue to Sink. Should You Panic?

By Bill Mann (TMF Otter)
May 24, 2000

What to do, what to do?

I am reminded of one of those fascinating Wild Kingdom animal shows. You know the ones (insert Richard Attenborough voice here): "The lioness springs from her hiding place, taking the herd of wildebeest by surprise. One beast does not move fast enough, and is overcome by the powerful cat. She sinks her teeth into the hapless creature's neck, waiting for the life to drain away. She and her pride will have a feast. On some days she's not so lucky."

Looking out at the market over the past two months, it's easy to feel like there is some beast clamping down, trying to drain the life out of us. The analogy is apt because the equity markets also operate by the immutable laws of the jungle. In the above exchange, the lioness is not taking out a personal vendetta on the hapless wildebeest, it's just business. It's safe to say the wildebeest, however, has deeper feelings about this particular transaction.

Has the market's activity of late made you feel like the wildebeest, the hapless prey of some greater, uncaring force? Welcome to a bear market, my friend. You don't have to lose your shirt to feel the change in confidence. Look at some of the discussion boards for the highest-flying companies for the last two months and you can sense the air being let out of the balloon. In March people were crowing about "buying opportunities," but as April turned into May and stocks continued to sink, some boards have shown more and more angst. Others have simply gotten very quiet.

The buying opportunities in March and April have not, in most cases, paid off very well yet. We've talked about this issue several times before, but it was usually in conjunction with a rapid one-day decline. But the Nasdaq has not rebounded and sits 16% below the low point of April 4, the day when its decline first threatened to become a rout.

These days, the Nasdaq has become the index that a large number of individual investors are interested in. I wish it were different. Other relevant indices show a somewhat different story. The Russell 2000 (a proxy for the small-cap sector of the U.S. markets) is less than 2% below its low from April 4; the S&P 500 is 3% below; the Dow Jones Industrial Average is less than 1% below; and The Motley Fool NOW 50 is 4% off the low from that day. These losses, over a two-month period, are certainly not catastrophic. In fact, we're at the same point as we were a year ago on the Dow, and nine months ago on the S&P. The Russell is where it was in September of 1997. The Nasdaq? The first time it ever crossed the 3100 threshold was in November. But try telling that to people who bought speculative stocks at the very top.

What we're seeing now is a little different, and it is much more severe than the last drop in share prices, back in the fall of 1998. At that time we had direct culprits: financial collapse in Asia, Russia, and Latin America. This time, we're swinging at vapors. Blame the Fed for tightening interest rates too much, but keep in mind two things: 1) They weren't wrong about inflationary pressures, and 2) the consequence of ignoring these pressures is worse by many times than the pain we're currently enduring. Say what you want about Alan Greenspan, but know that he was not charging at windmills when he kept ratcheting up rates last year.

So again, what now? Should you sell and give up on the equity markets entirely? Should you shop for more buying opportunities? Should you finally pursue your dream of becoming a rodeo clown? The answer to two of these questions is "maybe."

Remember that this current downturn, as atrocious as it has been, is barely more than two months old. It is not unheard of for the markets to remain flat or to drift downward for two years or more. David Gardner wrote at the beginning of this year about being willing to lose a significant percentage of his portfolio value and still be comfortable with it. Well, guess what has happened. And guess who is perfectly comfortable with it. The reason he is comfortable with it is that the pattern of the market does not define David's investing criteria. He knows his risk tolerance, and is willing to withstand severe bear markets as a result.

"Sure," you say. "The difference between me and David Gardner is that he enjoyed five great years before he had one bad one, while I lost money right out of the gate. I heard that the market was easy money, now I've lost out big time."

I can try to be empathetic here, but there are certain realities that every investor must face when he or she buys a stub of stock. First and foremost is that every penny of the money we hand over in exchange for the stock is at risk. Second is that stocks do not move in a linear progression. Just because we say stocks return 11% per year does not mean that each and every year the market moves 11%. In fact the S&P 500 has appreciated exactly 11% only once, in 1968. In 1973 and 1974, the S&P 500 lost a total of 37% of its value. Investors in more speculative companies lost much more. This was a period of 24 consecutive months in which the market did nothing but go down.

Two types of people were really hurt in this time frame: 1) those who invested, got frustrated at the losses, and sold, and 2) those who invested in bad companies and did not sell. You want to be in neither group. But if you are invested now, you are committed. You cannot go back in time and get your original investment back.

You can, however, examine your expectations of the marketplace. Did you believe, as many did last year, that stocks were the path to riches? Did you invest in the most speculative stocks, trying to gain the largest, fastest return? These are easy mistakes to make, but while you cannot unring a bell, you can make changes to improve your chances at achieving market success. Do not be afraid to admit that you made a mistake, and do not fear fixing that mistake by moving that money into more conservative companies, or into index funds. In no way is this failure. Failure is stubbornly refusing to acknowledge an earlier mistake, choosing to go down in flames rather than putting out the fire and salvaging the remains.

Finally, always be business-centric. If your research tells you that the company you hold is a good one, and your stomach tells you that you can handle the risk, hold it. Buy more. Be a business owner, in good times and in bad. Dare to be right, or to be wrong for the right reasons. That's Foolishness in a nutshell. And even though there is nothing in this world that can guarantee you success in equity markets, by focusing upon the quality of the businesses you invest in, you're doing all you can to stack the deck in your favor.

Investing during a down market can be challenging. We'd like to know how you feel and what measures you're taking to become more Foolish. Please pop over to answer this poll question about investor confidence and then share your insights on the Fool on the Hill discussion board.

Fool on.

Bill Mann, TMFOtter on the Fool Discussion Boards

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