Investors who stampeded to buy stocks Mar. 11 should have done so the previous day, if not days before the buying rush. This is not hindsight commentary. It's a "we have seen this show before" observation that should be obvious to savvy investors with experience. It is another validation of the classic fear and greed syndrome, from which many an opportunistic investor has reaped handsome rewards.
On Mar. 10, when the bears celebrated by pushing the Dow Jones industrial average lower by another 1.3%, a loss of 153.54 points, to 11740.15, panic gripped the market. One beleaguered investor warned me: "This is it, things will get worse, the market will sink deeper before it hits bottom." Fortunately, not everyone was in that kind of panic. The wise stayed calm amid the volatility.
One serious problem, however, is that on both ends of the bull-bear spectrum, investors go overboard. Pressured by the strong bullish mood on Mar. 11, investors went on a buying rampage, boosting the Dow by more than 400 points, to 12,157. The catalyst for the biggest rally since 2002 was the Federal Reserve Board's announcement that it was pumping $200 billion into the financial system to assist banks and investment houses that have been battered by the credit crunch and mortgage crisis. In the days before the market's robust ascent, when gloom prevailed, it was obvious to me that it would take only one piece of positive news to turn the market around. And the Fed came to the rescue.
Capitalizing on Fear and Greed
So what now? Is this the end of the bear run? Has the market hit bottom? Some say it is a bear trap, and the market will again capitulate and return to spinning lower. The smart-money investors really don't care. They make money either way. Their advice to investors: Don't sweat, bottom or not. The important thing to keep in mind is to prepare for either circumstance. When the going gets tough and the market pulls the market indexes down, look up. That's the time to buy stock. And when the rally-types come along, as on Mar. 11, look down. 'Tis the time to sell—not everything, of course, but enough stocks to take sufficient profits and stash some cash for the next time you should buy stocks—when another crash comes along.
What is important to remember is that in the past 20 years, there were only three peak-to-trough declines of the current magnitude or greater (before Tuesday's rally), which occurred in 1990, 1998, and 2000-02. Jeffrey Kleintop, chief market strategist at LPL Financial in Boston, reminds us that big market advances follow big declines. The declines that took place in 1990 and 1998, he recalls, may be the most comparable to the current environment. The 19% decline in 1998 was followed by a 12-month gain of 40% in the Standard & Poor's 500-stock index, he notes. And the 20% decline in 1990 was obliterated by the S&P index's 34% jump over the following 12 months. Since World War II, there have been 16 market declines of around 14% or more, Kleintop says. On average, the market rose by 32% 12 months after hitting bottom.
"The key to investing in the market is managing risk" in whatever direction the market is going, says Richard Steinberg, president and chief investment officer of Steinberg Global Asset Management, in Boca Raton, Fla. It is a simple case of fear and greed, he says, and knowing what to do in both scenarios. When fears invades the market and stock prices begin crashing, the astute course is to buy. And when greed takes over and the market vaults ahead, sell.
Steinberg's Stable of Core Stocks
Simple enough, yes, but very difficult to execute. One reason: People love to wait for the bottom and insist on predicting the peak. Good idea, but quite impractical, to my mind, because predicting the market's highs and lows is tricky, if not impossible. The best alternative is to prepare for either eventuality. How?