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Twenty-five Rules of Investing:  1  |  2  |  3  |  4  |  5  |  6  |  7  |  8  |  9  |  10  |  11  |  12  |  13  |  14  |  15  |  16  |  17  |  18  |  19  |  20  |  21  |  22  |  23  |  24  |  25 

 

 

No One Made a Dime by Panicking

 

 

Rule 7

You see it over and over again. A stock gets hammered. People flee after the hammering. The market gets crushed on a huge down day. People leave at the end of the day. A sector gets annihilated. Quickly. People can't take the pain; they bolt after the annihilation.

Panic is the operating instinct in all of these cases. There's something basic and instinctive about panic, about the desire to flee. It might work when it comes to individuals and things that might threaten us physically. But it can't make you a dime. That's why I say:

 

No one ever made a dime panicking.

 

There will always be a better time to go, a better time to leave the table than the one brought on by panic.

Let's take a classic panic, a run out of Biogen Idec (BIIB:Nasdaq - commentary) from March 2005. As soon as I saw the panic in that stock, I wanted to run the other direction; I wanted to buy. If you bought the heart of that panic, the $36 price, you could have made a quick 5 points. If you flipped it then, you could have gotten back in and already would have been up a couple for the investible side of the ledger. But by going up again, that stock made a mockery of those who fled.

We get mini-panics all the time in the market. We might have a mini-panic in Starbucks (SBUX:Nasdaq - commentary) off a weak monthly comp number, or in Panera (PNRA:Nasdaq - commentary) and Whole Foods (WFMI:Nasdaq - commentary) off a couple of not-so-great months. Those down-5 and down-10 situations don't need to be chased or participated in. A better time to sell will come.

I want you to do something for me next time there is a panic. I want you to take the opposite side of the trade. When you see one of those high-speed routs of a sector or a stock, buy a little. Get a feel for it. See what I mean. The most rewarding trades you can make are those where the decks have been cleared out by panicky folks using market orders who just don't get that the exit doors aren't as big as they think they are.

Mind you, I am not saying that all merchandise that gets panicked out of is worth buying for the long term. I am saying that it's a rare day when a stock or market that is socked that there won't be some sort of bounce that allows you to get out at a better price than you would have if you just joined the fleeing masses.

 

 

 

 

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