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The Price of Panic

You'll rarely find me traversing the halls of the Park Meadows mall in suburban Denver -- except during the holidays. Then I'll brave crowds to window-shop, waiting for a caffeine-inspired rush of adrenaline to inspire me.

Resist the impulse
Financially, of course, this is a miserable combination -- like pancakes and lima beans topped off with creamed corn. But don't take my word for it. Check the aisles at Amazon.com. There, I'll pay just $229 for a sleek, four-gigabyte black iPod nano. Now compare that with $249 at my local Apple Store. See what I mean? Buying on impulse can really cost you.

Making an awful year for stocks even worse
So can impulse selling. How do I know? Well, I've done this, too. And it seems I'm not alone: the Dow Jones Industrial Average has experienced a brutal downturn over the past three months, off 5% from a six-year high of 11,709.09. Or, in English: Investors have been selling a lot more than they've been buying recently.

Why are they selling? Who knows? Maybe fear of rising rates has spooked them. Or maybe $3-a-gallon gas. Or maybe the image of former Fed Chairman Alan Greenspan in a grilled cheese sandwich. Whatever the reasons, it smells like irrational fear. And that, too, has a price.

Leave that $11,737 at the door, please
In my wife's case, it's $11,737 and counting.

It was the summer of 2002. Everything was down, including the four stocks I had selected for my wife's portfolio. My ever-expanding gut told me that I didn't really understand the companies she owned. And since my wife wasn't going to learn this investing thing, I decided that my best strategy was to sell everything and get into cash. How incredibly stupid. Here's why:

Company

7/24/02 adj. sale price

8/14/06 adj. closing price

Forfeited gain

Caterpillar

$19.88

$65.96

232%

Int'l Paper

$34.62

$34.00

(2%)

JP Morgan Chase

$20.43

$43.89

115%

AT&T

$20.07

$29.99

49%

Source: Yahoo! Finance

Those gains would have added up to more than $11,000 if I'd been a little more patient before pulling the trigger. Ouch.

A $7 trillion panic attack
Press reports suggest that the collapse of the dot-com bubble wiped out between $7 trillion and $8 trillion in investor wealth. I've no doubt that's true. Certainly several outstanding firms lost more than half their value from 2000 to 2001:

Company

2000-2001 decline

Bankrate (Nasdaq: RATE  )

(59.3%)

NetEase (Nasdaq: NTES  )

(84.2%)

Select Comfort (Nasdaq: SCSS  )

(64.4%)

Mittal Steel (NYSE: MT  )

(58.4%)

NutriSystem (Nasdaq: NTRI  )

(97.1%)

Varsity Group (Nasdaq: VSTY  )

(63.3%)

Flamel Technologies (Nasdaq: FLML  )

(66.2%)

Source: Capital IQ

What may be less obvious is that each of these companies has also tripled in value over the past six years:

Company

2000-2006 gain

Bankrate

1,750.0%

NetEase

1,394.4%

Select Comfort

720.4%

Mittal Steel

365.5%

NutriSystem

302.3%

Varsity Group

213.4%

Flamel Technologies

204.0%

Source: Capital IQ

Had you sold early, as I did, you would have missed the multibaggers to come.

The Foolish bottom line
But that's often how it goes when you panic-sell stocks or mutual funds. It doesn't have to be that way, though. Learn the Foolish (i.e., prudent) way to buy and sell stocks by taking a free trial of our new personal finance newsletter service, Motley Fool GreenLight. Click here to learn more.

This article was originally published on June 12, 2006. It has been updated.

Fool contributor Tim Beyers thinks few things are cooler than saving moola. Just call him a Fool. Tim owns LEAP options in Apple. Get the skinny on all the stocks in his portfolio by checking Tim's Fool profile. Select Comfort and Flamel Technologies are Motley Fool Hidden Gems selections. NetEase is a Motley Fool Rule Breakers pick. Amazon is a Stock Advisor choice. JP Morgan Chase is an Income Investor pick. Mittal Steel is an Inside Value recommendation. The Motley Fool's disclosure policy is a multibagger in the making.


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Tim Beyers
TMFMileHigh

Tim Beyers first began writing for the Fool in 2003. Today, he's an analyst for Motley Fool Rule Breakers and Motley Fool Supernova. At Fool.com, he covers disruptive ideas in technology and entertainment, though you'll most often find him writing and talking about the business of comics. Find him online at timbeyers.me or send email to tbeyers@fool.com. For more insights, follow Tim on Google+ and Twitter.

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12/22/2014 4:00 PM
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