Tuesday, February 27, 2007

Thoughts For A Down Day from Peter Lynch

I guess a lot people suffer from acrophobia in China. The day after reaching an all time high, their market sold off nearly 9%. What is the exchange rate to US Markets? 9% in China = 3% in the U.S.

Now the 3% drop that we've seen in the Dow and S&P is hardly a disaster. Most of the people I've talked to consider it more "bloodletting" than "bloodbath" and have expressed some relief that the long anticipated correction may well be upon us. Of course, it may well not be. Time will tell. But I believe the wisdom of Peter Lynch is especially appropriate for today. Lynch once said,

"Far more money has been lost by investors preparing for corrections than has been lost in the corrections themselves."

Indeed, the Chicago Board Options Exchange Volatility Index <.VIX>, or VIX, shot up more than 37 percent today, the largest move since Sept. 17, 2001. In other words, the market received an injection of pure, unadulterated FEAR today.

So what does this mean? Well let's remember Mr. Lynch's counsel and take a look at the VIX.

Check out this chart:

Note the date at the top of this remarkable spike in fear -- June 13th, 2006

Now look at this chart:


Note the date on the market low for 2006... that's right. It's June 13th, 2006.

Why? Something I call Whack-A-Mole Syndrome (TM) . That is, the dangerous, but natural tendency for investors to become overly reactive to the stock market (i.e., selling low, buying high).

Personally, I love days like this. I hope the market drops another 3% before it closes. And I will be watching the VIX carefully. In my book fear = opportunity.

I'll close with another Peter Lynch quotation:

"The secret to making money in stocks is not to get scared out of them."

Good luck to all.