Questions about panic
 

The markets have experienced substantial declines lately, and some aspects of the sell-off appear to be unprecedented. The evening news suggests that the Nekkei index is down 9%, hinting at another sharp downward move in the U.S. averages tomorrow. Such action seems to be causing real financial damage to a great many people. As a side point, VIX is one measure of market volatility, and it has advanced to previously unseen levels. All of this may suggest a rising level of fear (perhaps approaching panic?) in the markets. In addition, the potential bankruptcy of the nation of Iceland seems to weigh on investors’ minds.

Markets sometimes experience capitulation. Investors sell without regard to value. They are, in a very real sense, irrationally fearful. After that, everyone who is going to sell has done so, and a few investors with cash reserves look around and see great values. They buy, the markets drift upward, and a new bull strolls in from the ashes.

So, capitulation seems a lot like panic. I have not had the opportunity to observe panic; but I suspect many members of this virtual community have. If appropriate, I would like to explore panic.

My purpose in asking the question is an attempt to discern signs of a turn in the market. Predicting the bottom of a bear market is hazardous, but if one can identify the transition there are some considerable benefits.

Is there some sort of personal or group behavior that precedes panic? What does a leader do to prevent panic, or interrupt the progression toward panic? Once a group succumbs to panic, how does the behavior pattern end? How do people behave after the panic, and how do they regard their behavior during panic?

Any thoughts are appreciated.

Training, and confidence (in oneself, one's fellow soldiers, and one's equipment).

If panic starts, quiet, cool confidence can sometimes arrest it. Experience is the real key.

Sorry, probably not much help there.

TR

Few extra bucks
 

Me and my better half were chatting about 30 minutes ago.

She said it was OK if I took a little of my gun show money and bought a few shares of a couple of things about lunch time tomorrow.

What the heck, I can always work harder.

Thank you, Sir. I always appreciate your thoughts.

Perhaps there are different types of panic; one instant, the other developing. For example, an untrained group that encountered a well crafted ambush might panic rather quickly. But is there a different type that grows over a period of at least minutes? If so, a leader might stop the process by exhibiting the behaviors you mention - but what would the leader observe that would suggest he needed to act?

I wish you the best of luck, Sir! The market has had such a strong down-move that it is overdue for a bounce.

I’m with Pete. I’m a buyer.

TR’s right:

Experience: My Grandparents went through the Great Depression and one set went through the Dust Bowl as well. They did just fine. We went through the ’87 drop and bounced back even better. Same thing with September 11.

Tranining: I read a Peter Lynch book where he said he was in Ireland on Black Monday in ’87 and couldn’t find a phone to start buying for his Magellan Fund. There were similar stories about wealth building in the ‘30s.

Optimism: This is still the strongest, freest, most productive, country in the world. We can weather this.

But, at my age, this might be the last downturn that I can afford to take advantage of. My son is DCAing in big time because I taught his all of the above. (I may need someone to change my diapers in the future. :D)

Pat

nmap- In your opinion, do you see any long-term negative affects as a result of the buyout? It seems to me that the unprecedented powers given to the likes of Paulson and Bernanke have the potential to be extremely harmful to the integrity of our nations institutions.

I will admit I only have a basic understanding of the markets, and macroeconomics, but this seems to be a very socialist policy being conducted by very shady characters. Aside from avoiding a Wall Street fallout, I can't see many long term benefits to such a major deviation from capitalist principles.

Hope you can show me some light here :)

Nmap, I believe you nailed it, as I sit here watching the futures markets, panic is exactly what you are seeing. I touched on fear in another thread.

Pete and PSM are absolutely correct, this is a buyers market, if you can weather the downturn, there is a vast amount of opportunity. If you have any doubts, take a look at what some of the major players have done buying up various real estate, companies, etc. These companies have snatched up hundreds of billions of dollars in real estate, inefficient companies, and the like. They buy them at rock-bottom prices, insert their own teams of efficient experts, and resell when they feel they have been offered the right price. These companies are almost never wrong, if they were, they wouldn't be around to tell about it.

That being said, what we are seeing currently is obviously nothing that I've seen in my short time in the business. People that I am acquainted with at Goldmann, the Central Park Financial Group, and others are saying privately that they haven't seen anything like this either(some of them are 30-50 years my senior). Obviously, many of these people went through Black Monday in
'87, so that is a bit worrisome.

Additionally, these people are not conspiracy theorists, but they seem to believe something deeper is happening here. Almost like an invisible force is driving this panic. I am not well-versed, or competent enough to make those kinds of assertions, but some of them seem to believe much of this could be political gone awry.

To get back to Nmap, I for one, have been fighting this panic during this downturn in the market every day. Fielding phone calls all day long is currently the norm, not just for me, but across the board. People are absolutely panicking. For some, this is completely justifiable, especially if you are nearing the retirement age.

For others, the media is taking an extremely rough situation, and running wild with it. This is almost certainly part of the drive behind this panic, and fear. Politically, this panic is playing directly into the hands of Senator Obama.

During times like this, a smooth orator can turn this panic to an advantage, which is exactly what you are currently seeing him attempt to do. At this point, he could probably tell most Americans he is going to burn their houses down, and it wouldn't change their vote.

Panic and fear breed blindness. When my clients get this way, I try to basically tell them to take the blinders off, and see the bigger picture. Here, your past honesty and integrity with these people come into play. If you've done right by them, it is a much easier task to ease their fear, and attempt to insert reason into chaos.

For those not sure of what to do if they are just initially getting into a market like this, I like to use the grocery store analogy. That being, when you go to the store, you buy things that are on sale, to get more for your money. In the long-term, the stock market is much the same. Obviously, this is barring a crash.

TR was absolutely correct about training and expertise. This is a hot topic for me, because I am relatively young to be in this business.

So, to stop panic, in addition to TR's statement, I'd add simplicity, and a common goal.

People need to have something simple they can hold onto, something to reassure them that the world is not ending. A simple grocery store analogy, a chart of the history of the stock market with it's overall upward trend, or other simple ideas that they can attach on to, in order to stop their world from spinning.

Without these, you have people listening to the talking heads on the television, which is just flat out counter-productive. Without this simplicity, they'd rather be told how they should be behaving, then thinking through it.

I apologize for the length of this post, as well as it being a bit scatterbrained. Hopefully it helps your quest just a bit Nmap. :eek:

From my limited experience with this subject, panic usually evolves when the normal rules of expected behavior, for whatever reason, no longer apply. In the case of the market, I imagine just about every model used to predict expected behavior has been turned on its ear. Folks are trying to predict the future from past behavior not really taking the time to draw any parallels between the conditions and factors that existed in the past to those that exist today. I am sure that there are some distinct differences because nothing remains static. Those that can control panic are the ones that have gained respect from their experience and expertise and have gained a level of respect from those that look to them for resolution, but usually the fact that they have met folks expectations in the past is usually insufficient unless they can also show, or have a clearly defined vision, of the way forward. It is critical for those that find themselves in this situation have not only the confidence of those that look to them for guidance but that the game plan for controlling the situation and moving forward is understood and within the abilities of those that find themselves flailing around in a panic mode. Those that are in a panic mode already see themselves as stakeholders in the outcome of the event, the trick is how to harness those stakeholders so that they no longer run around in circles at ever increasing speeds with the threat of running up their own 4th POC put providing a clear azimuth to an objective that they can all see and obtain. In the most dangerous of panic situations, the resolution can require unorthodox actions often at great personal risk.

nmap,

I retired in 1998, as VP of Domestic Sales with a respectable retirement package to help me thru my golden years, only I was very heavy committed into the Communications market. I personally knew the CEO at MCI and had invested $180k in their stock. I lost it all within 6 months. Now I'm almost 72 and working as a Security Guard. I don't really blame anyone but myself about the money I lost. But I can say,don't be afraid to SELL when the stocks are dropping. I didn't and I counted on an upturn that never happen........:boohoo

GB TFS :(

Yes, Sir, there are a variety of problems we will create with the bailout. Fundamentally, the federal government will acquire control of the banking and finance industry as well as a great many mortgage loans. AIG is an example; the Federal government will have almost 80% of the stock in the company. Presently, there is talk of federal recapitalization of the banks, which would result in some government ownership of the banks.

This level of ownership invites control. It also creates opportunities to reward political allies with board of directors memberships and executive positions. The potential for corruption is substantial. In addition, extensive government ownership of mortgages creates the possibility of new initiatives in public housing policy. I agree with your point that these policies smack of socialism. In fact, I perceive a trend that approaches “market socialism”, where government owns the “commanding heights of the economy”. ( LINK ).

I suspect the current policy is not concerned with the long term; rather, the goal is to avoid short-term economic pain and defer economic problems as long as possible. In my original advocacy of the bailout, I had hoped the problems we are experiencing would be avoided. Clearly, it has not worked yet - so we may end up with the worst of both worlds. The present trends, if they continue, are likely to be destructive.

Two insidious problems concern me. First is wide-scale economic disruption. This will tend to destroy the savings of a great many people. This particularly applies to the boomers who expected to retire soon. The decline in value in the housing and stock markets reduces the value of their assets. The increase in prices reduces the buying power of Social Security and pension payments. The boomers can then be expected to call for government intervention, thus increasing dependency – and also increasing the tendency toward socialism.

Second is damage to capital formation. As independent risk-takers are supplanted, the ability to raise money for promising (but risky) ventures declines. However, growth is fueled by such things. So we may have sacrificed opportunity in a (failed?) attempt at avoiding market discipline.

On an unrelated note…foreign markets are down substantially this morning, and Iceland appears to be headed toward national bankruptcy. The Hungarian bond market has, apparently, failed. Unless some things start going right, we face further disruption of global markets.

The real problem is that banks do not trust each other right now, so letters of credit are not being accepted. This matters because global shipping uses such instruments to finance movement of goods – and right now, those exchanges are in freefall.

I begin to perceive evidence of panic on some internet boards. If the store shelves empty due to a breakdown in global transportation systems, then I expect to see a broader example of panic.

I am reminded of a quote from the Baron Rothschild. “Buy when there's blood in the streets, even if the blood is your own.”

I think the time to buy is approaching - but I don't smell enough fear yet.

How about this...
 

I'm with Pete and PSM I'm buying. I am a mutual fund kind of guy as I do not have the knowledge or time to do the research needed to buy individual stocks. I have searched but have yet to find a Mutual Fund with reputable management that is designed to profit from this Grizzly market. It seems to me that there are plenty of buyers for such a product. I want a fund that is made up of the IBM's that are selling remarkably below their 52 week lows. I want a fund that does not have a stock like GM that looks to be the "buy" of the century to me, but in reality could go belly up.

Nmap your posts are very much appreciated. You can manage my money if you ever get back in the game!:lifter

Nmap:

Thanks for the posts. I really do enjoy reading your input into the economic crisis. I think 99% of the sites out there are freaking and geeking over everything that's going on. I think people should be concerned, but screaming that it's the end of the world sure isn't helping things.

Good discussion!

Panic, vice mob mentality/panic.

I like the training analogy, certain professions, several of which are represented on this board allow no room for panic, period! You panic, you or someone else dies as a direct result.

Flying a helicopter in combat allows no time for panic. Blood on the inside of the windshield (some of which is yours), Co-pilot slumped over the controls, instruments all dropping except the ones which warn of overheating, engine and rotor RPM plummeting, screaming noises from the transmission, which you can hear over the bullets smacking the aircraft, controls seizing up, bad guys everywhere, the ground is rapidly approaching and the aircraft is in a pitch up, or pitch down attitude! Panic is a luxury you can't afford, your job is to fight that helicopter with every ounce of your ability, all the way to the ground. And when it hits (hopefully right side up), you must shut off the battery switch, and everything else which could contribute to a fire, then you get your crew out. Set up a defensive position, and hope that someone is coming for you!

I heard a radio transmission on "Guard channel" in VN, it went something like this; "This is CPT XXXXXXX" he then gave his callsign, followed by "We are at 2000 ft, just lost my main rotor, tell my wife I loved her!"

Hope this doesn't detract from the discussuion.

charlietwo – you nailed it !!

nmap, what is a social system, where the government “owns the means of production” called ?

In a previous thread this was pointed out. The problem with “market socialism” is that the game then considers social issues, and not economic issues, such as capital formation. Investment becomes a choice between competing “social positions” rather than competing financial / economic issues. Corruption will run rampant, and the Hong Kong market of the 60’s / 70’s will look well disciplined by comparison.
Deferring the economic problems is the only goal of this entire exercise.

We will see a complete “reinvention” of the capital markets, and by extension our entire society. The control of industry and of all branches of production will be taken out of the hands of mutually competing individuals, and instead institute a system in which all these branches of production are operated by society (Central Government) as a whole.
After this disaster is concluded much of which was America will have disappeared.
This will take years, not months, and the end state will be the elimination of the “Bourgeoisie”, and all of us will be in the proletariat, and the proletariat will be led like a dog on a leash. Asking (begging) the Central Government for our needs, and “they” will dispense housing, food, medical care, heating oil, gasoline, etc. “and all lived happily ever after”, unless you disagree with the State.

The boomers will be the first in line for Government largess. But the Central Government will not have the means to satisfy the “increasing dependency”, and “they” will begin picking who gets what, and how much. If you are a “faithful follower” you will get to be first in line (all pigs are equal, some are more equal).

Competing Social groups, such as environmental, anti-nuclear power, anti-growth, the disadvantaged, those with real, or perceived grievances will set the agenda on how funds are raised, and for what ventures. “Green Jobs” will replace real jobs, and the Central Government will pick winners and losers (based on the latest poll numbers). A Government run sort of like “American Idol”, except who counts the votes.

I do not think we are even near bottom, and “put my money where my mouth was” in a few shorts this week. I will probably (selectively) do the same next week ad nauseam.
I also think there is an “Obama” factor in the world markets, where people are scared to death that this person may become POTUS. It isn’t that he’s black – it’s that he’s RED.
SnT