Panic Is Driving Today's Stock Market

With the S&P 500 making new 52-week lows, having fallen 15% from all-time highs in October, as the Bard of Avon might ask, "There, art thou happy?"

Before I rant any further, let me get one item out of the way. I admit that I've been very wrong. I've been saying to buy stocks all the way down since the October highs. I was wrong. I repeat: I was wrong. If nothing else I get the satisfaction of being unique. How many stock market pundits do you know who will admit when they've been wrong?

So what do you do now if you've been wrong right along with me?

The first thing to do is to stop and think. You do not — repeat DO NOT — want to do anything hasty just because you've lost money, and you're scared or angry or both. You're not going to help by making another mistake by acting precipitously, just for the sake of "doing something."

The last thing to do is to thoughtlessly reverse course. It's false logic to tell yourself that just because you've been wrong to be bullish the last couple months, therefore it must be the right thing to do to be bearish now. Sure, it would have been better to be bearish two months ago. But that was then, and this is now. The issue is: What's the right thing to do now?

Making that decision requires analyzing why stocks have fallen. Just because they've fallen, doesn't mean they'll keep falling — unless whatever made them fall is still operating, or there is something new that will also make them fall.

If you determine that there was no good reason for them to fall in the first place — or, even if there was, that there's no good reason for them to continue to fall — then you have no reason to sell now. You may even want to buy.

Oh, yes, I can imagine some readers are rolling their eyes at that last sentence. "Permabull Luskin," they're no doubt saying to themselves. "No matter how bad things get, he always comes up with some rationale for being bullish."

First, that's not true. Look at the archives of my early SmartMoney.com columns from 2001 and 2002, and you'll see I can be plenty bearish. But since early 2003, I've been generally bullish, and that's been exactly the right way to be. Now, just as over all those years, I'm only interested in looking at the facts as I understand them, and making the best call I can.