Perspective In The Midst of Panic

In the long run, the stock market is driven by fundamentals - the profitability, earnings, growth potential, etc., of publicly traded companies. In the short tern, however, emotions often inject themselves into the workings of the stock market.

The panic selling we have seen in the stock market over the past week that continued today is certainly such a time. No matter how unnerving it may be in the present tense, however, it is crucial to remember that when the market is gripped by panic, it burns hot and then burns out fast. At some point investors take a collective breath, look around and realize that Apple is still making IPods, Caterpillar is still making tractors, and Hershey is still making candy. The difference now is that those companies are unbelievable bargains compared to where their stock prices were this time last year.

In the interest of helping lend perspective to the current environment, following are a compendium of quotes and stats that may help you keep a calm head while others around you are losing theirs:


"The American economy is the strongest, deepest, most flexible, most transparent and most entrepreneurial in man's history; predictably, then, our financial system is the most resilient. Whenever this fire burns out, tidal waves of permanent capital will begin flowing in from all over the world, eager to participate on the ground floor of an epochal recapitalization."
-- Nick Murray, Financial Author, October 2008

"I have not looked at any of my holdings and don't intend to. I don't want to be tempted to jump because I think I'd be more likely to jump in the wrong direction than the right one. My advice has always been to choose a sensible diversified portfolio and stop reading the financial pages. I recommend the sports section."
-- Richard Thaler, professor of behavioral science and economics, University of Chicago Graduate School of Business.

"History offers abundant evidence that market economies are resilient. The world will find a way to manage its financial affairs without the advice of Lehman Brothers, and the residential mortgage loan will survive even if Fannie Mae does not. The key issue for investors is to make sure their financial future does not get derailed by events at a handful of firms, and that their portfolios are properly positioned to capture all the rewards the markets have to offer when the next upcycle begins."
-- Weston Wellington, Vice President, Dimensional Fund Advisors

"Normally, as a buyer, you have to compete with a lot of very, very smart competitors. But many of the smartest people are on the sidelines now because of redemptions, margin calls or panicked-out-of-their-mind selling. So you don't have to be as smart as you did before. You just have to be in the game."
-- Seth Klarman, financial author, as quoted in The Wall Street Journal, October 4, 2008

"Optimists can make a good valuation argument: Stocks are extremely cheap by historical standards. Based on the next 12 months expected earnings, the S&P 500 is trading at a price/earnings ratio of less than 12. But even if analysts are overestimating the next 12 months worth of earnings by 10%, that would still leave the S&P 500 at a historically low P/E of 13."
-- "Searching for a Silver Lining", Tom Lauricella and Annelena Lobb,
Wall Street Jounal Online, October 6, 2008

"The financial future is no more uncertain now than it used to be; in fact, it's far less uncertain than it was in the summer of 2007, when the Dow shot above 14000, the future seemed bright and utterly no one foresaw the disaster that would befall the financial system. The absolute certainty of blue skies ahead was an illusion then, and the notion that we all know that worse misery lies in store is an illusion now."
-- Jason Zweig, "What Should Investors Do Now?", The Wall Street Journal Online, September 29, 2008

"We have gone through, in this decade, the agony of having to unwind history's greatest stock market bubble, followed by the collapse of its greatest credit bubble. If that whole process were a 24-hour day, it can't be any earlier than 11:00 p.m. as we speak. And though the last hour may be very dark, its pain will be quickly forgotten in the great global expansion which must be coming."
-- Nick Murray, Financial Author, October 2008


•There is now $3.5 trillion in assets in money market funds. More than a third of those assets flowed in during this year's market decline and will flow back out once the panic selling subsides.

•Sovereign Wealth Funds now have more than $1 trillion in cash waiting to be invested in equities.

•Since 1926 there have been only four periods in which the stock market declined in consecutive years (1929-32, 1939-41, 1973-74 and 2000-2002).

•The U.S. economy has experienced 10 recessions since 1946. The stock market enjoyed gains in five of them.

•In the past 60 years there have been 12 bear (down) markets. Their average duration was 14 months. Their average decline was 22.4%.

•In the past 60 years there have been 12 bull (up) markets. Their average duration was 45 months. Their average gain was 123.9%.

•Since 1946, the average gain for large stocks three years after a recession ended was 47.7%. For small stocks the average gain was 74.0%.

•Since 1926, large stocks have enjoyed a 10.4% annual gain. However, over the past ten years large stocks (as measured by the S&P 500) have actually declined slightly. There have been only two other ten-year time periods in which large stocks declined. Historically such periods have been followed by extended, dramatic bull markets.

•Consider the following illustration and ask yourself..."Where are we on the timeline right now?"

The Cycle of Market Emotions