 |
 |
|||||
 |
||||||
|
||||||
 |
||||||
| There's No Room for Panic
by John M. Curtis Copyright April 1, 1998
Predicting the onset of a bear market is difficult enough, but suggesting when it’s time for investors to bail-out is another matter. Reading the market is far from deciding when it’s time to pull the plug on investments. Only individuals can know what’s best for them. One thing is certain: When the market takes a nose dive, otherwise confident investors begin developing the jitters. Many investors just don’t have the stomach to ride-out wild gyrations, and prefer to transfer their assets into less volatile investments. But uncontainable nerves shouldn’t be the cause of incurring unnecessary losses. As with other risky activities, the one who flinches first usually loses. Bailing-out too soon can be costly especially when the risks have been greatly exaggerated. Figuring out the real risks from those induced by panic can be a piece of work. And yet failing to do so can prove even more costly. When share prices plummet, savvy market watchers usually caution against allowing mass hysteria to guide otherwise rational investment decisions. Attributing market gyrations to international crises, domestic political scandals, foreign economic problems or even disappointing earnings’ reports, can be misleading by not acknowledging how fund managers drive share prices up or down. Like any other industry, profits are maximized by buying low and selling high. Purchasing massive blocks of shares usually pushes prices up; and selling massive blocks of shares hammers prices down. Although there are many factors which trigger buying or selling, the bottom line is profit or loss. International crises or domestic controversies are more politically correct excuses than openly admitting that fund managers are in a feeding frenzy. Most people prefer euphemisms over the more vulgar reality that the market is really about unbridled greed: Maintaining profits — like most businesses — is the bottom line. When fund managers 'take profits' and dump large quantities of stock precipitating a widespread sell-off, small investors usually follow suit. Despite their best interests, they jump on the bandwagon with so called ‘panic selling.’ Unlike small investors, fund managers aren’t in it for the long-term. They earn their living by taking short-term profits and, once share prices plummet, buy back the same shares they recently dumped. Before second guessing fund managers, small investors might be well to ask themselves, as economist Arthur Laffer suggests, "what are the fundamentals?" When inflation is ‘under control,’ unemployment at record lows, bond yields slowly sinking, and the Fed assuring stable, low interest rates, there’s simply less places for investors to earn a decent return. Where else can investors go? By acknowledging these ‘fundamentals,’ investors might be able to control their ‘panic’ when programmed selling creates the illusion the bottom is about to fall out. When the market turns southward, it’s also helpful to note what percentage the drop represents of the total market. Large point drops which amount to relatively small percentages [> 10%] should help keep things in perspective. For the average investor who plays the market, developing the ‘long-term’ view is helpful but doesn’t control the ‘jitters’ or ‘panic’ when the market appears to be in a tailspin. Until one cashes-out, losses are only on paper. Unless there’s something fundamentally wrong with a given issue, investors would be well to ride out the storm caused by fund managers unloading massive blocks of shares. Blaming this process on headlines in the news, serves no other purpose than perpetuating the same faulty beliefs leading to unnecessary ‘panic.’ Reminding yourself that fund managers periodically take profits, can save you from being seduced into making impulsive decisions. As long as investors aren’t pressed for immediate cash, what’s wrong with waiting until fund managers buy back the shares and drive prices up? While it might take a days, weeks or months, it’s still preferable to cashing-out fundamentally sound investments, paying commissions and taking an unnecessary beating. Bailing-out and cutting your losses should be based on more than following institutional investors’ transient moves to snatch short-term profits. Like sky-diving, controlling panic is essential to survival. As the market swings wildly, it’s helpful to remain focused on your investments, not following the stampede either into or out of various investments. Recognizing that fund managers can’t take profits until they sell, should help account for why periodically the market sells off, rather than focusing on extraneous news items which only play a marginal role in market flip-flops. Even trying to tie share prices to corporate earnings is risky business. While it’s good to show profitability, share prices aren’t closely correlated with corporate earnings or any other single factor. When investors are clamoring to buy shares, it’s a good bet that share prices will rise. When anxiety drives investors to the sidelines, you can expect prices to drop. Despite all the current ups and downs — unless Mr. Greenspan has a sudden change of heart — investors are likely to return and profit from the only game in town. About the Author John M. Curtis is director of a West Los Angeles think tank specializing in human behavior, health care and political research and media consultation. He’s a seminar trainer, columnist and author of Dodging The Bullet and Operation Charisma. |
||||||
old on to your hat," says the philosophically-minded economist Arthur Laffer, "it’s going to be a wild ride." Echoing this sentiment, business journalist Jane Bryant Quinn notes "that if you’re worried about where the market is going tomorrow, you shouldn’t be in the market at all." "Take the long-term view," says economist Alan Sinai, "and you’ll avoid a lot of panic." Striking a bearish tone, market forecaster Henry Kaufman urges investors "to lighten their stock portfolios and consider money markets and government bonds." Deciding which way to turn — whether you follow your own instincts or listen to others — is like playing the Price is Right — you don’t know who to listen to. Allowing panic and irrational thoughts to interfere with cool and collected decision-making is shortsighted and even self-destructive. When faced with adversity — especially tumultuous market conditions — many investors prematurely hit the panic button and induce self-inflicted wounds.|
Home || Articles || Books || The Teflon Report || Reactions || About Discobolos This site designed, developed and hosted by the experts at ©1999-2000 Discobolos Consulting Services, Inc. |
