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A Look Back in History: An Open Letter from The Motley Fool After the Collapse of Lehman Brothers in 2008

Dear Fellow Fools,

Over the past 48 hours, markets around the globe have dropped, in no small part because of the collapse of Lehman Brothers and Bank of America‘s sudden purchase of Merrill Lynch. Today’s volatility is more of the same, with uncertainty surrounding the future of AIG.

We understand that the current state of the stock market and of the financial industry can be disconcerting. But we encourage you to remain calm. You may be tempted to act rashly, but please remember: This, too, shall pass.

And one of the primary reasons it shall pass is because not every financial firm made ill-advised and reckless decisions about leverage. Case in point, the stock of Berkshire Hathaway has actually risen since Aug. 1. There are still plenty of sound, well-run businesses that will reward us for being patient.

And the beauty is that many of those businesses are being sold at a discount to their fair value, simply because financial firms like AIG made terrible decisions. In fact, all of this is merely another turn of the cycle that has allowed so many investors to generate great wealth in the markets. Warren Buffett and his teacher, Benjamin Graham, are right: Over time, the market is a weighing machine. Companies cannot make poor financial decisions without eventually having to deal with the consequences. By allowing the collapse of Lehman Brothers to happen, the federal government and industry giants have indirectly decided to allow the capitalist system to do its work.

We believe this is a good thing — it is a statement of hope, and we believe you should embrace it. (And we continue to hope that the Federal Reserve will not intervene on behalf of AIG.)

During the next few days and weeks, the markets promise to be extremely volatile. The response from Wall Street and the financial press will range from euphoric to despondent, and much of the advice you hear will be emotional and short-term in focus. We also recognize the very real risks in the market today. More companies are sure to struggle.

But at the same time, we urge you not to panic or react in haste. If we retain our wits, we can’t help but make better decisions than the majority of investors. Here at The Motley Fool, we tend to avoid companies with significant debt in favor of companies with unleveraged, cash-rich balance sheets, companies like Buffalo Wild Wings, Quality Systems, or Intuitive Surgical. Although the crisis in the financial sector is dragging the market as a whole down, there are opportunities yet to be found.

History has shown that after virtually every sudden drop the market has experienced, it recovered within a few years. Case in point: Six months after the 1995 Oklahoma City bombing, the S&P 500 had gained 17%, and six months after the lows of Sept. 11, 2001, it was up nearly 19%. Even if the rewards aren’t immediately obvious, in the long term, objective analysis of the opportunities and risks will prove superior to an emotional reaction.

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This article was written by Bill Mann, and first published on Fool.com on 16 September 2008. It has been edited for Fool.sg. The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of Intuitive Surgical.