The Panic Investment Cycle

We have often repeated some basic principles of investing, including advising readers to recognize that every stock varies in price more as a result of emotion and other factors, than as a result of the company's real business activities. The most important factor in buying or selling a security, is the timing. If you buy when the price is cheap, you will make money. If you buy when the price is high, the next fall in price will hurt you.

If you buy when the stock is priced low, and sell when exuberance is at its height, you look like a very savvy investor. All it takes is patience.

There is now a new name for this phenomenon. It is now called "The Panic Investment Cycle". It details how the same security will vary in price dramatically due to emotions having little to do with the underlying value of the stock itself.

Doug Fabian, editor of the Successful Investing and High Monthly Income newsletters, describes this cycle as follows:

"The panic investment cycle is a migration in emotion from optimism to excitement, then thrill, and then virtual euphoria about how well things are going. Unfortunately, in the absence of the proper risk management tools, this emotion usually morphs into anxiety once an investment begins to break down. That anxiety then becomes denial, and it is at this point that the fear factor invades. Soon after the fear comes the panic selling, and it is at this capitulation point, when nearly everyone is despondent, that the real opportunity for income investors presents itself."

The Stock Market Cycle

We have always advised our readers to invest in this manner, as it is an easy way to make excellent returns on your investments, cycles, but we are happy to agree with this new name, for a very old adage. Something like The Black Swan event, which description became popular some years ago, and it also described a re-occurring event that has been a truism for as long as investing has been around.

Buy Low, Sell High

You often hear this truism, and yet people miss opportunity after opportunity to follow this basic and simple way to invest. People are always jealous of others who have either bought at an opportune moment, or sold at an opportune moment. Yet investors fail to follow this very simple and basic rule of investing.

Why don't people buy low and sell high - because people have a basic instinct to follow the crowd. When there is fear in the land, history is ignored and fear takes over.

Fear that the debt crisis in Europe will destroy the economy. Yet the restaurants, hotels, trains and planes in Europe are packed - in the prosperous north at any rate. Northern Europe is a modern, vibrant economy that ebbs and flows as does every prosperous economy.

Fear that the fiscal cliff in the USA will destroy the economy. Let me give you a simple truth. No stupid and self serving politician is able to destroy the US economic powerhouse in so simple a fashion. There could be a bump, and a serious bump, in the economy. But retail sales are booming. Black Friday is projected to provide record sales. House sales are at the highest level in 4 years. Auto sales are setting records, and much more. There is suffering, but the economy will continue.

Fear that China is slowing down. A friend just returned from China. There are people crowding the restaurants and shopping areas. A new middle class has been created and it wants goods and services. Car sales are booming. Demand for high end goods has never been higher. Will there be bumps in the economy - for sure there will, just as there are bumps in every economy. As Baron Rothschild said centuries ago - "Buy When There is Blood in the Streets".

Fear that Japan will collapse under the weight of its enormous debt. Could be. Maybe they won't be able to continue their profligate borrowing. But this is a society that until this year was second only to the US in economic production. It may flounder somewhat, but it won't disappear. The millions of middle class consumers will still exist. The massive car production will still exist.

Fear that war will erupt in the Middle East. Let me remind the reader, that the Great Depression was ended by borrowing and using that borrowing to dramatically increase production facilities. Heaven forbid that we have a war, but if we do, it will be good for the economy.

How to Make Money in this Tidal Wave of Fear

Ignore the experts. Ignore the media. Remember the truism that has stood the test of time over hundreds of years. Buy Low, Sell High.

Stocks are depressed currently. They are at low points. Multiples of p/e are low. Companies are increasing cash reserves rather than investing. This is when stocks are low. Buy now. Sell when the frenzy of the next cycle hits its height.

The bargains that are available now, come around once in a decade. If you miss this opportunity, the next one wont come for many years.

Buy good value stocks, with good management, with no debt, and with valuable unrecognized assets. Then sit back and wait. Wait patiently.

The views expressed in this blog are opinions only and are not investment advice. Persons investing should seek the advice of a licensed professional to guide them and should not rely on the opinions expressed herein. This blog is not a solicitation for investment and we do not accept unsolicited investment funds.

Buy low sell high, Investing, Irrational Exuberance, Jeremy Grantham, Long Term Returns, Stock market cycles, Sustainability, The market is inefficient