guidelines of value disappear. People no longer examine what a stock is worth; instead they are fixated by prices cascading ever lower. The faUing prices are reinforced by expert and peer opinion that things must get worse.

Further, the event triggering the crisis is always considered to be something entirely new: nothing in our experience shows us how to cope with the current catastrophe. "Sell, sell, sell," the savants chorus. "No matter how low prices have fallen, they are destined to go lower yet."

It is through this rout of panicky investors-who as they rush past you shout how awful conditions are up ahead-that you must resolutely advance. However, as this section will show, you will certainly not go in unarmed. If you can shield yourself with the psychological armor provided in the previous chapters, you have an opportunity to make major gains. (Okay, if you have a swagger stick to smack against your jodhpurs, it couldnt hurt.)

To see that it is possible to keep your cool, and benefit from the enormous overreaction a crisis brings, lets return to an old battlefield. Well look at the Gulf Crisis, at its worst in the fall of 1990. The Dow Jones Industrial Average had been knocked down over 15% in the midst of the most severe panic in bank and financial stocks since the Great Depression.

Heres the rule to remember as we re-create the heady crisis that got the nineties off with a bang.

RULE 29

Political and financial crises lead investors to sell stocks. This is precisely the wrong reaction. Buy during a panic, dont sell.

My Forbes column on October 22, 1990, describes the environment at the time.

With the world seemingly on the brink of war, should you buy now, sell or stay on the sidelines? Although thousands of Wall Street reports have been devoted to every major crisis through the years, no coherent strategy has ever been developed to cope with these recurring but frightening confrontations. The advice given by experts over time has almost always been a knee-jerk recommendation to sell.

After examining the 11 major crises of the postwar period, I found that this has been exactly the wrong thing to do, in every single case. Analyzing the subsequent market action also makes it clear that there is

a definite way to react to a crisis and a very high probability that you can profit, regardless of whether the roots of the crisis are financial, monetary or political.

Table 12-1 shows the eleven major crises since World War II, ranging from the Berlin blockade in 1948 (when we stood eyeball-to-eyeball with the Soviets on the brink of war) to the crash of 1987 (the worst of die twentieth century). Of the 11, 6 were political; the other 5 were brought on by economic, investment or financial factors.

The figure measures the Dow Jones Industrial Average at the bottom of each crisis, when experts predicted prices could only tumble lower, along with die subsequent performance one and two years later. A glance at the record tells it all. The consistency of results is remarkable. An investor would have made good money one year later in 10 of the 11 crises, and would have lost in only one, and then a mere 3.3%. The average gain one year later would have been 25.8% with the gains ranging as high as 43.6% after the 1969 to 1970 break and 42.2% after the 1973 to 1974 bear market.

Holding stocks for two years after a crisis resulted in spectacular retums. A buyer would have made money in all 11 crises, with an average two-year gain of almost 38%, and appreciation ranging up to 66.5% after the market dechne of 1973/1974. Granted, no one buys at the bottom, but even if an investor were 10% or 15% off the mark, he or she

Table 12-1

Appreciating Crisis

Performance of the Dow Jones Industrial Average through 11 major postwar crises.

Appreciation

Symptoms of a Crisis

How do we know when a crisis has arrived? The symptoms are anything but hard to find, and usually are downright unavoidable. They appear on prime time news or in banner headlines, whedier it was the Iraqi invasion of Kuwait in 1990, the stock market crash of 1987, or the bear market of 1973/1974. In each case, the crisis is the major news of the day. Legions of experts are interviewed, most making dour forecasts of structural damage to the nation. A common theme is "things will never be the same again."

Because the nation, if not the world, is focused on the crisis, the media is in its glory. I remember that after the 1987 crash I received scores of phone calls from reporters because of my prior work on panics and crashes. During the course of one call, it became apparent the reporter had little understanding of the stock market. I asked him (diplomatically, I hope) if he had covered the investment scene for long. "No," he rephed, "I normally cover obits, but my editor yanked me off them; he said this was more important."

A crisis sells newspapers, builds ratings, and peddles advertising. CNN devoted most of its resources to the Gulf Crisis and the Gulf War for months. Before the shooting started, CNNs creative programmers produced feature after featitre about the ramifications of a Gulf War. The military situation became a gigantic, worldwide, pregame Superbowl show, lasting months. Chart after chart showed the weapons of the two teams-I mean, armies: attack fighters, bombers, infantiy and armored divisions, missiles, artillery, poison gas, ad infinitum. So that you would not tum away from your screen, the forces of the opposing teams looked equally matched. Many people, myself included, were swept up by the news, so much so that we watched virtually the same dispatches over and over.

In point of fact, many experts and quite a number of lay people knew it was not going to be even close, as subsequent events bore out. Tme, the Iraqi military had a large number of armored divisions, equipped with the most sophisticated Soviet tanks. However, it had shown itself all but incompetent to handle them during the eight-year Iraq-Iran war that had ended only a few years earlier. The best effort by an Iraqi Pat-ton was to move several regiments about twenty miles in one major bat-

would still have made big bucks buying into the crisis Although

gut-wrenching, holding-and even buying-in a panic is a winning strategy.