Unless you've been vacationing in Siberia or eschew traditional news sources for tea leaves and crystal balls, you've probably noticed that global markets have taken quite a tumble in the last couple of months. Right now, we're all left to wonder whether the correction is over. About 5.5% has been squeezed out of the Dow, 8.5% from the Nasdaq, and 6% from the S&P index since the second week in May. So is it time for investors to collectively say "I'm taking my ball and going home," or could this be a great buying opportunity?
Mind your mind
Without a doubt, there is a lot of psychology that goes into investing. Investors are constantly making evaluations that are based not only on cold, hard facts, but also on past experiences and the hard-wiring they're born with. So, as a result, investing decisions, especially when there's high volatility in the market, are not always made from an entirely rational point of view.
In my own investing, I've found that managing thoughts and emotions can often be as important as researching the stocks themselves. Nothing can screw up perfectly good research like an emotion-driven selling spree when the market starts to look a little wobbly. By the same token, being able to recognize psychology at play can help put a down market in perspective and give an investor the confidence to seek out some great bargains.
In the area of behavioral finance, studies by Nobel Prize winner Daniel Kahneman and his late partner-in-crime Amos Tversky formally examined the idea of loss aversion. Basically, loss aversion is the idea that most people feel losses far more than they feel commensurate gains, and therefore they avoid situations where they could take a loss -- even if that means passing on an opportunity to grab an even larger gain. By extension, in a down market, when we're all looking at more red than we'd like to see in our portfolio, it can be that much harder to see the sense in doing some buying.
One fool's trash is another Fool's treasure
Looking back to 2001 and 2002, a time that's surely near and dear to all investors' hearts, there were plenty of bargains created by investors who went a little too far in all the excitement. When the tech bubble burst, stock prices plunged, and with them went the desire for most investors to put new money into the market. Hot tech stocks like Broadcom (NASDAQ:BRCM) and Lucent (NYSE:LU) saw more than 90% of their value disappear in around 18 months, and that's surely bound to give anyone pause.
Though stocks were no longer the subject of cocktail-party conversations, some tech companies, like Symantec (NASDAQ:SYMC) and Marvell (NASDAQ:MRVL), were still managing to do good business in 2001. In a tough business environment for technology products, Symantec eked out a 15% gain in revenue during 2000, while Marvell was able to swing 77% revenue growth. Both also managed to be profitable in 2001, though for Marvell, you had to wade through some non-cash charges on its income statement. For the investors who were willing to see past the hysteria and carnage, the gains have been worth it. Symantec is up more than 250% versus their low five years ago (or about 29% per year), while Marvell is up more than 350% (or over 35% per year) since February 2001. In dollar terms, if you had split a $10,000 investment between the two, you'd be looking at nearly $39,000 today.
Those two aside, there is no shortage of other great stocks that have put up huge gains since that time frame. Best Buy (NYSE:BBY) is up more than 300%, Bear Stearns (NYSE:BSC) more than 200%, Amazon.com (NASDAQ:AMZN) nearly 300%, SanDisk (NASDAQ:SNDK) nearly 400%, and Hilton Hotels more than 250%. Even boring old ConAgra is up more than 40% -- and that's in addition to its nice dividend yield.
While we're not seeing the same magnitude of sell-off right now, the idea is the same: When you can find high-quality companies, the stocks are always bought best when they're cheap.
Time is on your side
If you happen to be sitting on the proprietary trading desk of an investment bank as you read this, this probably doesn't offer much help with your daily profit-and-loss column. On the other hand, if you're more of the Foolish persuasion, you are free to let your stock picks age like a very fine wine -- and I think this is how stocks are best enjoyed. Wharton professor Jeremy Siegel has my back on this one, since his book, Stocks for the Long Run, argues that, over the long run, stocks are the single best asset class to have your money in. And if that's true, then why not go ahead and take advantage of a few blue-light specials?
For more market Foolishness:
Best Buy and Amazon.com are both Motley Fool Stock Advisor selections. Stock Advisor has outperformed the market by almost 40% since 2002. To try a 30-day free trial, click here. Symantec is an Inside Value selection.
Fool contributor Matt Koppenheffer admits that while knowing about loss aversion continues to help his investing, it didn't do much for his bets on the U.S. in the World Cup. Currently, Matt holds shares in Marvell but does not have a financial interest in any other company mentioned; he welcomes your feedback.
