On the front cover of The Hitch Hiker’s Guide to the Galaxy, the traveller’s manual in Douglas Adams’ popular novel of the same name, was a simple piece of advice: “Don’t Panic.” This also happens to be good advice if you are an investor – and not just now, in the aftermath of the attacks on the United States, but at almost any time. In fact, many investors should probably have heeded that advice in 1999, when the market was deep in the throes of a buying panic. And it is just as timely now, when the impulse may be to sell just about everything you own and head for the hills.
If you were to sell everything, you would certainly have plenty of company: Despite all the talk about investors holding fast – or even buying stocks – to show their resolve in the face of terrorism and so on, the Dow Jones industrial average and the Nasdaq stock index both went into free-fall when trading opened on Monday, with the Dow dropping by almost 600 points or more than 6 per cent, and the Nasdaq off by about 6 per cent as well, or over 100 points. After an attempt at a rebound of sorts both indexes started to head south again, hitting lows not seen since the latter part of 1998. Tuesday brought a brief respite, but then the selling intensified again on Wednesday.
So should you join the stampede? Not unless you enjoy throwing good money after bad. The fact is that rash decisions are rarely wise decisions – unless you want to rely on the chance that you might accidentally make the right choice, which probably isn’t the kind of attitude you want to take when dealing with your portfolio. If that is the approach you want to take, then you might as well head down to Las Vegas and put some money on your favourite number, or throw a handful of darts at the stock pages. Throwing all your stocks out the window because of an all-consuming fear of a global meltdown sparked by last week’s events falls into the same category.
Not panicking also covers some of the behaviour that investors might feel compelled to take, apart from selling everything – such as the desire to buy stocks indiscriminately, as a gesture of patriotism or solidarity with the United States, as some financial advisors and columnists were recommending late last week. That may seem like a nice gesture to make, but it isn’t likely to help you or even the economy as a whole.
Holding tight to every stock you own is also not the wisest course, since there are stocks in certain sectors that arguably should be sold – shares in some airlines, for example, whose financial future might be in doubt as a result of a sharp drop in international and business traffic; or shares in certain large insurance companies who might find themselves on the hook for tens of billions of dollars in claims; or some hospitality stocks, on the assumption that travel might suffer.
Conversely, of course, the contrary impulse – to buy some of everything, since this must be an enormous buying opportunity if you were at all bullish before the attacks occurred – would also likely be an over-reaction. As difficult as it may be, investors should do what they (at least theoretically) attempt to do at other times, when there are no disasters and war is not looming large on the horizon, and that is to take a little time and think about what is happening and what it might mean for their portfolio, before coming to any conclusions about which stocks to buy or which to sell.
Warren Buffett, the legendary value investor known as the Sage of Omaha, told the TV show 60 Minutes on the weekend that he wasn’t planning to sell anything, and that depending on how much certain sectors fell on Monday, he might start looking at buying a few stocks. That may be boring and uninspiring, unlike the call to “Buy a stock for America!” that some market watchers have been promoting, but boring is how Mr. Buffett came to be worth $30-billion(U.S.) or so. It doesn’t make for great headlines, of course, but it helps to avoid a lot of the ups and downs of the day-trading crowd.
A survey of past catastrophic events and their effect on the stock market proves the point even better: According to data crunchers such as the folks at Markethistory.com, in virtually every case going back to the turn of the century, a disaster or war event of some kind has caused benchmarks such as the Dow and the S&P 500 index to slide by anywhere from 5 to 12 per cent – but in six months to a year, those indexes were higher than they had been, having made up all the ground they lost and then some. That goes for the bombing of the World Trade Center in 1993, the invasion of Kuwait in 1990, Pearl Harbor and the sinking of the Lusitania in 1915.
In other words, there are plenty of reasons for buying and selling stocks in the wake of the attacks in the United States – but some of them, however well-meaning they might be, are unsound.