Oh, spit!

OMG!

The sky is falling!

Stop. To steal a line from Cameron Crowe's 1989 Say Anything: "You must chill. You must chill."

Yes, I understand that almost any market average you look at is down 4% or more over the last couple of days. I get it. Ford (NYSE:F) is down 4%. Intel (NASDAQ:INTC), 6%. Apple (NASDAQ:AAPL), 10%. Heck, one of my own stocks -- American Science & Engineering (NASDAQ:ASEI) -- dropped 15% after bombing its earnings report Monday. Scary.

Yet if you're reading this, it means I'm still typing. I haven't jumped out any windows. (Not that it would help matters any. I'm on the ground floor.) That sort of dramatic overreaction doesn't help. Panicking as your stocks plummet won't slow their fall, and it won't salvage your portfolio. It'll only lock in your losses.

Well, what should we do?
You should thank the good Lord -- or your deity of choice -- for providing you with an object lesson in the volatility of the markets.

From time to time, we all need to be reminded that asset prices can go down as well as up. Otherwise, we might do something stupid -- like, say, pay 516 times forward earnings for a share of Overstock.com (NYSE:OSTK). Or buy a $200,000 house for $300,000, finance it with a no-money-down subprime ARM mortgage at 2% with a six-month balloon payment, and then wonder why we can't afford the mortgage when the rate resets to 6% and our monthly payments suddenly triple.

Hypothetically speaking, and present company excluded, of course.

No, no -- what should we do about the stock market?
Oh, right. Well, just keep on doing what you've been doing. I did say "present company excluded," right? So keep collecting and depositing your paychecks ... researching high-quality, low-priced stocks ... buying shares at a significant margin of safety ... and purchasing no more of any given stock than you can afford to lose. (Because even we make mistakes from time to time.)

Once you've got that down, though, it's time to get greedy.

Greed is good
See the opening lines of this column up above? A lot of investors are saying things like that right now. Even the pros are panicking. The hedge-fund types? They're worrying about making their quarterly numbers, and they're selling out of positions to stop the bleeding.

Meanwhile, you should consult your stock "wish list" -- you've drawn one up, right? -- and see whether today's panic selling has pushed any of your favorite stocks down below your hoped-for buy-in price. Today just might be your lucky day.

In short, while the so-called Wise Men of Wall Street are busy selling their favorite stocks, you should be marshalling your pennies, updating your buy list, and deciding how far GE (NYSE:GE) and Microsoft (NASDAQ:MSFT) have to fall before you'll be willing to buy in.

Further fearless Foolishness:

This article was originally published on July 26, 2007. It has been updated.

American Science & Engineering is a Motley Fool Rule Breakers recommendation, and Microsoft and Intel are Motley Fool Inside Value picks. Try out either service free for 30 days.

Fool contributor Rich Smith owns shares of American Science & Engineering. Sadly, The Motley Fool's disclosure policy forbids his buying any more of them for at least 10 days after this column is published.