Inside Wall Street: Don't Panic -- Buy When Everyone Else Is Selling

Gene Marcial's Inside Wall Street
Gene Marcial's Inside Wall Street

What to do when investors worldwide are in a state of panic? The legendary investor John Templeton, who founded Templeton Funds, had this advice: "Buy only what is being thrown away." That's advice worth heeding today as anxiety overtakes the investment world once again.

Here are some other words to consider:

"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. . . . Panic can be your ally. When investors jump on the bandwagon of fear, 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."

I wrote that in my book, Gene Marcial's 7 Commandments of Stock Investing, published on Jan. 28, 2008. Just a year later, my words of advice on panic came to fruition as the market plunged to record lows, with the Dow Jones industrial average, the Standard & Poor's 500-stock index and the Nasdaq composite index falling into the basement. Panic was in the air as fear dominated the market and trumped greed.

Panic selling caused tremendous grief among investors. Except for those who stood firm and counterpunched, and bought stocks that were indiscriminately thrown overboard, as Templeton had advised and as Buy Panic chapter of my book advised. Those investors were richly rewarded. We all know that by late 2009 and early 2010, the market had soared, culminating in the Dow, S&P 500, and Nasdaq rocketing back up.

The Generosity of a Meltdown

And now, sparked over the past several weeks by the financial crisis in Greece and fears that it will spread across Europe and destroy the euro, massive selling pressure has swept the market as many investors, once again, panicked. And once again, however, investors are also looking at unprecedented opportunities, as scores of stocks crashed to new lows.

Regardless of whether the market decline has more to go on the downside, investors should be mindful of rare opportunities that market meltdowns provide so generously. A panic isn't the time to sell; it's the chance to buy.

Two chapters in 7 Commandments of Stock Investing are germane to what's going on now, which has caused the Dow to tumble 4% last week and 3.35% year-to-date, pulling the 30-stock barometer to 10,193.16, and dropping the S&P 500 by 4.2% last week and by 3.99% year-to-date, to 1,135.68. The book's first chapter, "Buy Panic," and the third chapter, "Buy The Losers" (or fallen angels), should be strategies that investors adopt at this crucially important turn of events.

One example I cited under the Buy Panic maxim was the horrific 9/11 terrorist attacks in 2001, one of the darkest moments in U.S. history. Justifiably, panic gripped the nation. When the New York Stock Exchange reopened just a week later -- in a symbol of American resiliency and resolve -- droves of investor rushed to sell anyway. The Dow on Sept. 21, 2001, crashed by about 1,000 points, to 8,235. People dumped practically everything in a frantic fire-sale event.

But many more steeled and experienced investors took the opposite route: They bought shares massively -- and reaped huge rewards afterward. Some six months later, on March 19, 2002, the Dow had rebounded to 10,635.25, up 2,400 points from where it was on Sept. 21, 2001.

Listen to Ed Yardeni

The lesson is obvious: Don't panic, and buy when everyone else is selling.

Ed Yardeni, president and chief investment strategist of Yardeni Research, has stayed steadfast in his stance that the bulls will outscore the bears in the current tug-of-war. To bolster his argument, he's come up with A Dozen Reasons Why Investors Need Not Panic.

Here are some of them:

-- Stocks are now cheap, with the market's price-earnings ratio down to 12, compared with the normal p-e of 15.

-- U.S. corporate profits should remain remarkably resilient as companies continue to find more business around the world.

-- The U.S. economy, stock market and the dollar are likely to remain the "best of the dodgy breed."

-- The recent plunge in U.S. Treasury bond yields pushed mortgage rates below 5%, which should boost some housing activity. Thus, mortgage-backed securities could be less toxic and continue to generate capital gains.

-- The 20% plunge in oil prices will bring down inflation around the world.

-- The Federal Reserve Board and the European Central Bank will lead the world's four major central banks to lower official interest rates close to zero in the foreseeable future, as the Fed is bound to keep the Federal Funds rate at zero.

-- The euro-mess isn't likely to be as troublesome as the U.S. subprime contagion was.

-- Europe's toxic assets haven't been buried in blind pools of CDOs (collateralized debt obligations). So there's less collateral risk in the current turmoil.

-- China will probably succeed in cooling off speculation in high-end real estate. Urbanization and suburbanization should continue to provide plenty of growth.

Indeed, investors need to become pragmatic and educated opportunists during times of turmoil. To repeat one of my book's seven maxims, panic can be an investor's ally. Benefit from it.