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The Best Way to Handle a Stock Market PanicBy
Tuesday, October 4, 2011
It's normal to feel lousy about your stocks these days.
The share prices fall... You log into your online account... The numbers are all red and much lower than they were several months ago... And you just feel bad. It's normal.
But be careful you don't let your emotions lure you into making a mistake. That's easy to do... There are a lot of voices screaming loudly in your direction. Almost all of them are trying to scare you so you'll become dependent on them for information and guidance.
I've made my living in the publishing business since 1997. You can count on most people in the industry to sell what they think is popular. And good investment ideas are never, ever popular. Think of how unpopular gold was in 1999 or how unpopular stocks were in 2009.
Still, many investors let the media and the market tell them what to do. When the market rises, they believe it's telling them to buy. When it falls, they believe it's telling them to sell. There's a much larger and even less informed group that simply feels good when stock prices rise, so it keeps buying... and vice versa.
This is the worst type of herding behavior. It is a terrible way to approach investing.
Value investors don't let the market tell them what to do. They take advantage of the market's offers to buy and sell at various prices. So the delight we take in a falling market is a primary distinction between value investors and others.
Remember... value investing isn't about making great macro calls. It's not about calling the next crisis, or predicting interest rate trends or GDP numbers. It's impossible to accurately predict those things. If you believe you know someone who is able to call the market's ups and downs, just wait a little longer... They'll soon be wrong.
Value investing is about doing research, taking your time, picking great companies, buying them at cheap prices, and holding them for as long as the business continues to perform well. The moment you think it's about predicting the future – and that you've got a crystal ball – you've already lost.
So my advice right now is to tune out the hysterics. Don't panic. And, most of all, don't abandon the discipline of buying great businesses when they get cheap.
With the S&P 500 nearly 19% below its 52-week high, I'm finding some attractive new ideas that warrant further research and might represent great bargains in excellent businesses. I'm in no hurry... But I like some of what we see.
And a few of my favorite businesses were cheap before the drop and have gotten even cheaper. Take Microsoft, for example. The share price is down 14% from its January high. But the business continues to produce excellent results...
For the year ended June 30, 2011, Microsoft's sales and pretax income grew 12%, and its fully diluted earnings per share grew 28%. It generated just shy of $25 billion in free cash flow. Two weeks ago, it raised its dividend by 25%. Microsoft now yields over 3% (and growing). Finally, Microsoft is in pristine financial condition, with over $50 billion in cash and short-term investments and less than $12 billion in debt.
When you're feeling lousy about your stocks, this is the kind of information you need to remember. And companies like Microsoft are the kind of companies you need to buy.
As long as you plan on keeping your money in the market for 10 years or more... and as long as you buy great stocks for great prices... a falling market shouldn't cause you anxiety.
It should cause you delight.
Good investing,
Dan Ferris
Further Reading:
"Huge amounts of money are going in and out of stocks for reasons having nothing to do with the long-term value of the businesses involved," Dan writes. "If you can get on the other side of this, you'll wind up owning some fantastic businesses that are being discarded by people who have no idea what they own." Learn how here.
Last month, Steve showed DailyWealth readers two sectors trading at absurdly cheap valuations. But that doesn't mean they'll soar from here. "Stocks could go sideways for a couple years... staying cheap," he writes, "before the big uptrend finally kicks in." Get the full story here.
Market NotesA NEW DOWNSIDE BREAKOUT IN THE EURO The big news in the currency market this week: The euro just staged another important new low.
Back in late August, we highlighted the euro's "compressed" state. This is a situation where an asset's day-to-day volatility gradually dries up and the highs and lows move closer together. These low-volatility periods are often the calm before a storm.
While we don't place much stock in conventional chart-reading at DailyWealth, we've seen "compressed" situations lead to explosive moves too many times over the years not to watch them closely. And we expected to watch the euro's compression resolve itself to the downside.
As you can see from the chart below, our call was well-timed... Just after we published our note, the euro broke out of its compressed state to reach an eight-month low. It then staged a "relief rally" that gave euro bulls a bit of hope. But that rally fizzled... And yesterday, more bad news from Greece caused fresh selling in the euro. The currency broke down to its lowest low since January. The euro bear market continues...
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