Why Market Panics Might Be Good

The following’s an excerpt from Wikipedia about the origin of the word panic:

“The word derives from antiquity and is a tribute to the ancient God, Pan. One of the many gods in the mythology of ancient Greece: Pan was the god of shepherds and of woods and pastures.

The Greeks believed that he often wandered peacefully through the woods, playing a pipe, but when accidentally awakened from his noontime nap he could give a great shout that would cause flocks to stampede.

From this aspect of Pan’s nature Greek authors derived the word panikon, “sudden fear,” the ultimate source of the English word: “panic”.”

Personally, I believe that market panics – falling prices caused by a stampede of sellers – are challenging times for stock market participants. In fact, when market panics happen, market participants may tend to do the wrong thing.

For instance, long-term investors may start selling stocks because of the prevalent fear in the market place, even though the fundamental strength of the businesses that they own may still be intact. Meanwhile, speculators might turn around and become “long-term investors” – they refuse to sell their stocks even when they have broken businesses in the hopes that they would turn around!

Both actions are understandable – fear is hard to overcome while losses are painful to accept – but they can be wealth destroying.

It may be tough, but it’s good to note that a market panic may be seen as a great opportunity to buy stocks at bargain prices. Panics can drive stock prices to irrational lows, and those may be great times to invest.

The stock market seems to me to be in a panicked state at the moment, as evidenced by the Straits Times Index’s (SGX: ^STI) decline of nearly 15% over the past month. In such times, it may be beneficial for investors to keep a cool head and focus on making rational investing decisions.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned.