It's not always easy for me to practice what I preach. Even though I should know better, the recent stock market drops got me at least a little stressed out. Last Monday, it was hard to look at how much my various holdings had fallen and not wax wistful about their fatter values of a few days or weeks ago. General Electric
Still, I am a longtime Fool writer. I know that from day to day, the stock market goes up -- and down -- and that over the long run, the trend has always been up. Better still, I know that I'm a net investor at the moment, and for the foreseeable future. In other words, I'm not at a point in life where I'm taking much money out of my nest egg. I'm building it. So yes, it may make me wince to see that the nest egg has shrunk. But it also means that there are more bargains to be had now than there have been in quite awhile. In his 1997 letter to shareholders, Warren Buffett explained this concept well:
If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? ... Even though they are going to be net buyers of stocks for many years to come, [many people] are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the "hamburgers" they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.
Since I'm adding money to my brokerage account (gradually, to be sure), I'll be finding more attractive places to park that money after market decreases than I would have on more ordinary days. If I'm smart, I can make the most of the panic.
But sometimes you have to act fast. Think about these possibilities, for example:
- Would you like to invest in most of the U.S. stock market? Then jump into a broad-market index fund, such as one based on the S&P 500. After Monday's slide, shares of the typical index fund were almost 5% cheaper than they'd been the previous week.
- You may want to be more particular, zeroing in on stocks that interest you. A glance at your online watch list can show you which of the stocks you're interested in have dropped substantially.
- You can also focus on the areas of the economy that are hardest hit. If, for example, you have a lot of faith in Wells Fargo
(NYSE:WFC) or JPMorgan Chase(NYSE:JPM) , you would have been able to snap up shares at considerably lower prices after that Monday. Each dropped 10% that day before rebounding sharply during the rest of the week. - Finally, think about what these drops mean. Not only are you looking for bargains, but others are, too. Warren Buffett himself has had his checkbook out in this environment. This could be a good time to buy into a great, well-managed mutual fund.
Deciphering drops
Think about what these price drops really mean. Did the overall stock market and the S&P 500 deserve to drop as much as they did? Sure, the financial industry landscape will likely be different once the dust settles. But will Coca-Cola suddenly be selling fewer beverages? Will FedEx
In other words, for many companies, share prices are cheaper just because of investors' fear. And when the fear ends, those stocks are likely to go back up.
The trick is being ready.
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