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Buy Panic: Gene Marcial on How Market Meltdowns Can Be Your Ally

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When panic grips the stock market, waves of selling overtake practically every stock. There is panic on the upside as well, which drives up stocks in a frenzy. Gene Marcial gives you an idea of how to react to such meltdowns. It explains how investors should confront panic in the marketplace. The thesis: Panic can be your ally.
This chapter is from the book
  • “Buy only what is being thrown away.”
  • —John Templeton, legendary investor and founder of the Templeton Funds

Welcome to the world of panic, the big generator of market meltdowns. It is tsunami-like: When panic grips the stock market, waves of selling overtake practically every stock. There is panic on the upside as well, which drives up stocks in a frenzy. This chapter gives you an idea of how to react to such meltdowns. It explains how investors should confront panic in the marketplace. The thesis: Panic can be your ally.

When investors jump on the bandwagon of fear in times of panic, don’t be a follower. Investors should not join the running of the panicky bears or bulls. Panic begets loss of logic. And when logic goes, investors become vulnerable to jittery mob mentality. That is a sure pathway to pain.

On February 27, 2007, when the Chinese stock market crashed almost without warning, U.S. investors went into a panic, causing the Dow Jones industrial average to plunge 416.02 points, or some 3.3 percent, to 12,216.24. Many of the investors I called the next day for a reaction had one common answer: “We sold.” Panic was in the air. In less than a month, however, the market regained much of what it had lost. The Dow had trekked back up to 12,481.01 on March 23, 2007. The market gained more energy and continued to climb, hitting an all-time high of 14,000.41 on July 19, 2007. The bulls ruled again. However, as the sub-prime mortgage problem appeared to worsen, fresh fears mounted over concern that the sub-prime meltdown appeared to have infected credit markets around the world. Again, panic gripped the market on August 9, 2007, driving down the Dow Industrials 387 points, or 2.8 percent, to 13,270.65. The bears took control—but not for long. On September 18, the Dow posted its biggest one-day percentage gain since 2003, soaring 335.97 points, or 2.51 percent, to 13,739.39.

The Federal Reserve Board was behind the big bounce: It cut the federal-funds rate by half a percentage point to 4.75 percent, which exceeded most economists’ prediction of a quarter-point cut.

The two market crashes during February and August of 2007 were followed by robust rallies, which were tremendous opportunities to make money. Another opportunity to bargain-hunt came up on November 12, 2007, when the Dow slipped below 13,000, to 12,987.55, as investor confidence was rattled by the continued fallout from the credit-market crisis sparked by the mortgage maelstrom. It was the first time the Dow had closed below 13,000 since August 16, 2007. By November 16, 2007, the Dow had rebounded to 13,178. For sure, it is likely to bounce around some more but I would be very surprised if it doesn’t jump back to an upward trend.

These crashes paled in comparison to how scared investors were during the horrible 9/11 terrorist attacks in 2001. Justifiably, panic gripped the nation. The New York Stock Exchange shut down operations to prevent panic trading from overwhelming the market. When the Big Board reopened a week later, droves of investors rushed to sell.

Uncontrolled Fear

Indeed, the 9/11 attacks were one of the darkest moments in U.S. history. The market world looked like it was headed for total chaos. The entire nation, along with the rest of the world, convulsed and panicked. And, not surprisingly, many of the institutional investors rushed to protect their investments and issued sell orders—indiscriminately, in most cases.

Such dire situations almost always provide opportunity for steeled and pragmatic investors to make handsome profits. Investors with the wherewithal to snap up stocks when nobody wants them wind up counting rich rewards. Investors had ample opportunities to pick up real bargains. Let me recount how the market crashed in the aftermath of 9/11 and then picked up to climb to record highs three years later.

The market was already teetering before that tragic September 11, 2001. The Dow stood at 9,162.23, down from 11,337 on May 21, 2001 in the aftermath of the bursting of the tech bubble and an economic slowdown. On September 11, the stock market operations became disrupted by the terrorist attacks, and the markets shut down for a week. Pandemonium reigned when the market reopened, and by September 21, the Dow had tumbled by about a thousand points, to 8,235. Practically all stocks were for sale and, despite the bargains to be had, few people had the spirit to go bargain hunting. The market remained a barren source of good news, with small rallies failing to find legs to stand on. The rest of 2001 was a lost cause as the market continued to inch lower, but again that period represented a “Buy Panic” opportunity to some steel-hearted investors. Indeed, by early 2002, the market was showing some signs of life, and on March 19, 2002, the Dow had cranked up to 10,635.25. That period from mid-September of 2001 to March opened a window of opportunity for those who had hunted for bargains.

By March 11, 2003, equities again tumbled in a big way: The Dow plunged to 7,524.06. Was it another buying opportunity for the panic buyers? Indeed, it was, for right after the market’s dive in March, the Dow started to race up again, hitting 10,453.92 on December 13, 2003. By that time, the air seemed to have lifted, with the market once again feeling unbounded.

After climbing from late December of 2003 through March of 2005, the Dow didn’t do much the rest of the year. 2006 was a turning point for the market. It was the year when the Dow started to hit new record highs. On December 27, 2006, the blue-chip barometer jumped to 12,510.57, marking the beginning of a robust rally, despite the more than 400-point decline in February 2007. It started packing higher, striking new record highs almost every week. On July 19, 2007, the Dow soared to a heady, all-time record high of 14,000.41.

Two kinds of panic spook investors. One is panic that affects the entire market, created by national or global events. Inflation, recession, massive earnings declines, or national calamities are forces that produce total market chaos. The second type is panic associated with specific events that impact a particular stock or group of stocks or industries. In such cases, the crash is stock specific or industry specific.

I discuss examples of these kinds of breakdowns, such as the ones instigated by government probes into the use of accounting fraud in some of the major corporations, resulting in the ouster of top executives. In the process, the shares of those companies were severely beaten down.

To take advantage of the awesome declines, investors must plot a clear strategy to seize opportunities during a market panic, which usually comes out of the blue.

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