Stock markets are behaving as if all the indexes will go to zero in less than a month, maybe sooner. No one knows the future, but I for one have a hard time believing that this very real, very serious financial crisis will play out by going to zero. The Dow Jones Industrial Average, a proxy for the market, has in fact experienced record of volatility and panic selling this high only three times since December 31, 1946, the end of World War II:
- October 16, 2002, when the Dow Jones was 8,036.03
- November 9, 1987, when the Dow Jones was 1,900.20
- November 5, 1974, when the Dow Jones was 674.75
No one knows where and when all this panic will land. Some wonder if it ever will. It will. History records that extreme volatility and panic selling do not last indefinitely. At some point, the invisible hand of Adam Smith kicks in and eliminates whatever shortage exists. Some would say his invisible hand has already been working off the shortage of buyers. Extreme volatility and panic selling provide wonderful opportunities to buy shares of excellent businesses at bargain prices. Today’s headlines are rarely the same as what history’s judgement is going to be.
If you haven’t already seen it, study the wonderfully perceptive presentation by Weston Wellington of Dimensional Fund Advisors that Justin described in his post of October 2, part of which is below:
- “Earlier this week, I came across a presentation by Weston Wellington with Dimensional Fund Advisors, called “Is It Different This Time?” Wellington reviews our nation’s past and, in particular, the media’s reaction during those time. He does a great job of bringing some perspective to a volatile time. (Justin said viewing it was guaranteed to lower blood pressure 20 points for every viewing. If current levels of volatility and panic don’t ease up soon, I’ll need to view it several times a day. I guess there could be lot worse things than reinforcing one’s long-term perspective.