Was The Panic Worth It?

FOR YOUR READING PLEASURE :-

“Someone's sitting in the shade today because someone planted a tree a long time ago”


Make no mistake. The past 12 months have been nothing less than a global market panic.
Freddie Mac and Fannie Mae imploded. Bear Stearns got "rescued," along with AIG and when somehow Lehman Brothers wasn't saved, the panic became a selling mania – a loss of rationality, something close to mass hysteria. These events created a perfect storm where top U.S. banks were eventually bailed out by the Fed. The last two stand-alone investment banks on Wall Street - Goldman Sachs and Morgan Stanley, fled for relief by becoming bank holding companies. The global markets tumbled, erasing the past 12 years of market gains. The Volatility Index (the "fear index") still showed the worse of market uncertainty until March 2009.
The list could go on. The question is – was the panic worth it? Now that global markets seem to have stabilished with higher capital creation and liquidity, are we calm enough to reflect on how have we handled the panic feelings? Have we wasted a totally ‘good crisis’ ?

To help us answer these personal questions, let’s look at the panics of the early 20th century stock market crashes in the U.S. and see if we can draw some similar conclusions.
The last official panic -- the Panic of 1907 -- shook the U.S. economy to its core. Wall Street brokerages failed, depositors ran on banks, well-known companies went under, and the market's liquidity was in question (sounds familiar?). In this instance, J.P. Morgan and friends famously put together US$25 million to keep the market afloat - a role now occupied by the Federal Reserve. By 1909, the Dow Jones index had more than recovered from pre-panic highs.
In 1914, the year the Great War began in Europe, the U.S. stock markets actually closed for nearly four months after foreign investors began pulling their money out of U.S. equities en masse to support the war effort. When it reopened, the market was devalued about 30%, but sustained rallies doubled that opening by the end of 1916.
Then, of course, came the Great Depression -- the single most important economic event in U.S. history which began with the Crash of 1929 and lasted until the U.S. entered World War II in 1941. In 1932, unemployment hit 24.9%, and more than 9,000 banks failed during the 1930s. And there were no federally insured deposits until the Banking Act of 1933 created the FDIC, so when the bank failed, Americans’ hard earned money went with it. In fact, Wall Street's very future, not to mention the economic model of capitalism was in question.
For those investors who had both the money and the courage to invest in the 1930s, it paid off. One man famously borrowed money to buy 104 U.S. stocks trading for less than $1 a share in 1939. Talk about investing at the point of maximum pessimism! Four years later, though, his money had quadrupled. His name, of course, was the late Sir John Templeton.
OK, so what's your point?
We've seen bad markets before. And in every case, the point at which the market has turned irrational or overly pessimistic is precisely the time we long-term investors should have bought equities.
Despite the headlines proclaiming the next Great Depression, the current credit crunch is no Great Depression. However, market conditions can still remain arguably rocky in the short run. Unfortunately, this uncertainty seems to be the right music in the hands of the financial media, whose job is to attract readership by sensationalizing news events, and usually fanning the flames of unnecesary panic. Remember, bad media sells, old boring news don’t.
In reaction to most of these bad media which we sometimes term it as “financial pornography”, we tend to panic and get out at all cost in scary times, realizing our losses. We like to keep up with our neighbors so we behave in a herd-like fashion. We stay up nights extrapolating the most recent trends and expect that they will continue indefinitely. All these tendencies have the ability to work against us and preclude us from reaching our financial goals. It is no wonder most investors end up discouraged with their investing activities, only to lament that it is always a zero sum game.
So, what can Individual investors like us do in times of uncertainty? We should forget the game of short-term trading, and stick to longer time horizons. The media and ‘stock market gamblers’ focus on minutes, hours, and days, while those who are serious about the other areas of their financial life focus on years and decades. Unfortunately, some people waste so much time and effort in predicating the next stock market level, trying to double guess which stocks will soar, that they have entirely neglected the other more important areas of their financial life which are foundations to securing a stable financial future. Time can be better spent following a systematic approach to retirement planning and a conscious effort to accumlating wealth rather than emotional short term trading without a direction and a purpose. On that note, do remember that greed is not a valid purpose.
Back to our 1st question : “Was the panic worth it?”. The answer is : “It depends on what you did.” If you were taken in by the panic – you sold off your positions (realizing your losses) or sat on your position (you did nothing to average down), then you have wasted a good crisis. However, if you had accelerated your longer term wealth accumulation plans during those periods, you have strengthened your financial foundations for the future. And you’ll be glad you did when you look back in a few years’ time.