How to Survive the "Zombie" Stock Market


Just how much do you have in common with the undead? Perhaps more than you know.

Last Friday, moviegoers piled into theaters for the highly anticipated release of Hollywood's first summer blockbuster, World War Z. Adapted from Max Brooks' best-selling novel, the film was billed as the next big thing in a long line of money-minting zombie flicks.

It joined the likes of Lions Gate's Warm Bodies, which opened at $20 million in February, and AMC Networks' wildly popular television series The Walking Dead, now in its fourth season.

But for investors, this widespread zombie fascination requires some reading between the lines.

You see, just hours before the film's release, a single Federal Reserve announcement caused the stock market to take a hard turn for the worse. With the S&P 500 index (down 2.5% on the day) leading the descent into the red, all major indexes plunged that Thursday, closing out the worst day for the market so far in 2013.

The timing of this market drop and the $66 million open of World War Z is merely coincidental. However, their convenient juxtaposition gives me pause.

Because the way I see it, we're living through a "zombie" market. Let me explain...

The brains behind eating brains
Like most Hollywood trends, the film industry's flavor of the week can often serve as a barometer for measuring national (sometimes global) sentiment. As ridiculous as it sounds, the zombie genre is no different.

These films have carved out their niche in Hollywood not just because they're fun and terrifying, but because they reflect our very real fears about society.

So what are we really afraid of?

Impending doom, certainly.

More than that, though, we're afraid that when disaster hits, our society will cannibalize itself (literally and figuratively). We watch these films because we need reassurance. We need to know that if push came to shove, someone would be capable of restoring normalcy.

Which is why, in every zombie flick, the characters that survive are those who can remain faithful to rational thought and behavior. The characters who fail to do so succumb to their flesh-eating foes --moments before becoming part of the mindless mob themselves, driven only by a primal pack mentality.

It's a simple takeaway: Stick to your guns and don't lose your cool. But when you're staring a "disaster" in the face, keeping a level head is a tougher task than one might imagine. Which brings me back to last Thursday's market performance...

Fighting the "zombie" market
With market meltdowns still clearly in our rearview mirror, investors have been conditioned to expect the worst. Add in constant chirping from financial pundits trying to call the top, and it's no wonder Wall Street is on edge.

This is the essence of the "zombie" market: Instead of embracing a bull market, we're waiting on the first sign of trouble. Waiting for the first chance to pull out all our money and run.

But living in fear of disaster is no way to invest. In fact, it's the best way to overreact and miss out on substantial gainsin the stock market.

Looking back on last week, large-cap stocks like Yahoo! and Hewlett-Packard got hammered (falling 3.4% and 2.8%, respectively) on the heels of Ben Bernanke's Thursday announcement that stimulus support would taper off later in the year. Disappointing? Maybe. A sign of the apocalypse? Hardly.

Still, many investors hit the panic button, unwilling to stick around for whatever "crash" might follow the S&P's 2.5% pullback.

Here's why they're "dead" wrong
When your portfolio is bleeding money, it's easy reach for the "sell" button. But it's during those times that your investing principles are most important. Specifically, remembering that your shares represent a piece of a company -- not just a pile of cash.

So take a step back, and ask yourself one simple question: "How does this affect the company?" Don't bother asking, "How does this affect the stock?"

Bernanke's announcement on Thursday essentially told the market it was time to take off the government training wheels. As a result of rising employment and a recovering economy, the Federal Reserve no longer sees a need to buoy the market's performance.

While that news might cause a few early hiccups for shares, it largely doesn't change how a company will function. In the long run, the only thing that will affect these companies are their businesses. Not the discontinuation of stimulus funding.

If you're a Hewlett-Packard investor, your primary concern should be the company's ability to penetrate the burgeoning big data market, projected to double in value by 2016. HP faces a long road to becoming a big-time player in a space dominated by IBM, and may soon find that its costly focus on infrastructure won't pay off. Regardless, HP won't look like a "sell" unless it fails to wrestle away market share from IBM in the next three years.

For Yahoo!, all it takes is a quick peek at company financials to realize that the market overreaction has nothing to do with the company's future prospects. In the past year, Yahoo! shares have outpaced the Nasdaq by more than 45% despite marginal revenue increases in 2012. Plus, with nearly 30%-per-year growth projected for the next five years, it doesn't look like the company will get derailed by the Fed.

In such a fragile market environment, it's easy for investors to get caught up thinking about the stock instead of the company. Unfortunately, that's how market zombies are born.

All it takes is a whiff of bad news and a handful of doomsday investors to start cashing out. Then, it's never long before the lemmings start lining up to join the mindless mob. Forgetting, of course, that the stock market has weathered darker days en route to 11% average returns per year, since the 1930s.

The Foolish takeaway
The stock market in 2013 has spoiled us. By enjoying the fruits of a bull market, many of us have forgotten the bitter taste of loss. However, investors who will succeed in whatever bull or bear markets that follow will be the ones who don't abandon reason, and put their money behind solid, reliable companies for the long run.

Don't join the zombies at the first sign of trouble. Keep calm, and Fool on.

Besides keeping your cool, the best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.

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Ryan Katon has no position in any stocks mentioned. The Motley Fool recommends AMC Networks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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