When the **** Hits the Fan

NEW YORK ( TheStreet) -- The other day on TheStreet I hoped for a stock market crash.

That didn't sit well with a handful of readers. No surprise. Understandably, carnage makes people uneasy.

It's not like I was wishing for an earthquake. I fear the damn things. And, really, other than implementation of more seismically appropriate construction standards after the fact, not much, if any, good comes out of a tremor that does meaningful damage.

I dislike setbacks of almost any type as much as the next comfortable, self-entitled American.

That said, after you (not you!) get a grip, grab some context.

I don't like economic ruin. And it stinks when people lose their jobs. It's also sort of annoying to see CEOs catch raises while so many folks struggle. I have written articles and will likely write more lamenting the cold hard realities of life in an uncertain and increasingly unequal society.

It's all about perspective.

Speaking as an investor, I want a crash every once in a while and even more frequent corrections. Sure, people get hurt, but that's life. And life's events, good or bad, present opportunity to investors.

As with many endeavors, it takes time to evolve as an investor.

Maybe more than anything, that evolution consists of learning how to deal with emotions.

Psychologists can describe the scene with more precision, but think about those moments when the bottom falls out of the market. Think about how you react.

About 8 zillion things happen in your head over the course of less than a second. From there, you respond to your reactions. It's a bit like growing as a lover; the more adept you become as an investor, the better your ability to control your response to market stimuli.

At first, you have no control. As you gain control, you experience setbacks.

Case in point: The Apple ( AAPL) flash crash of Thursday, February 10, 2011.

I was long AAPL at that time via the stock and call options. In less than an hour, it dove from roughly $360 to about $349, taking the final legs down in minutes and seconds.

I got stopped out of part of one position. That's forgivable, however it made me rethink how I use stops.

If I had it to do all over again, I would have purchased more -- a lot more -- on the crash. If nothing else, it had the makings of an excellent day or swing trade. Instead, I sold all of my call options for a loss and some of the stock that did not get stopped out for a gain (my cost basis was around $280).

I should have doubled down.

First, there was no way the drop was the function of a "normal" market. Second, the reasons some folks gave for the selloff -- such as the rumor Steve Jobs was in the hospital -- were little more than short-term noise.

As much as I worry about Apple in a post-Steve Jobs world (that, along with post- flash crash jitters and other factors prompted me to sell AAPL prematurely in March), I knew, with hindsight as my guide, that the stock would recover if not immediately, over the next few trading sessions.

But this clear-thinking logic did not come through when I panicked. That was a setback during a time when I thought I had experienced enough market hysteria to react to it with clarity, not a hasty, anxiety-fueled decision.

In this case, there was no reason for AAPL to plummet. And if one existed, it wasn't good enough to warrant even partial liquidation. In that moment, however, I do not think I had much, if any, control over my actions.

Flip ahead to the summer of 2011, particularly August. We experienced considerable volatility.

Recall the PowerShares QQQ Trust ( QQQ) ending July at $58.00, only to tank by as much as 14% over the first nine days of August.

During this period, I bought stocks, particularly media and telecommunications names.

I remember reading reports from loads of folks who sold in a panic. Of course, it helps to have had more time to react than you do during a flash crash, but it takes control and discipline to not only stay the course, but double down.

Certainly, quite a few folks sold because they saw everything from a double-dip recession to a repeat of 2008 on the horizon. Some of these cats still sing the same tune with the Q's in the mid-to-high 60s.

On dips, corrections or crashes -- we dipped a bit on Tuesday and Wednesday -- you have choices to make. I see more sporadic downside between now and January, so I'll pick my opportunities and do two things.

One, buy the Q's. And, two, accumulate shares in strong companies.

Stocks like one of my favorites at the moment, Starbucks ( SBUX).

Just like you have to ask yourself in a stock-specific flash crash, Is this a real move down that will sustain?, you have to ask yourself when there's downside, is a particular stock down in sympathy with the broader market? Is it weak because of macro or micro factors?

With Starbucks, you'll always have some sort of overhang. Weakness on concerns over Europe, commodity costs or a slow-to-move U.S. economy. This is all macro stuff that has nothing to do with Starbucks' business over the long haul.

During times of trauma, humans tend to look to familiar and reliable objects and/or other humans for comfort. I take the same approach with the market. When I feel like I have met my match in a dark alley, I'm going with a name like Starbucks. Chances are it will be around the next time the you-know-what hits the fan.

I anticipate plenty of these types of opportunities over the next three to six months. Don't focus on the drama and the hysteria of the 24-hour news cycle; focus on how you react as a smart investor.

At the time of publication, the author was long SBUX.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Rocco Pendola is a private investor with nearly 20 years experience in various forms of media, ranging from radio to print. His work has appeared in academic journals as well as dozens of online and offline publications. He uses his broad experience to help inform his coverage of the stock market, primarily in the technology, Internet and new media spaces. He has taken a long-term approach to investing, focusing on dividend-paying stocks, since he opened his first account as a teenager. Pendola, 37, is based in Santa Monica, Calif., where he lives with his wife and child.

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