When overpriced stocks suddenly fall, what exactly should investors do? Easy. They take advantage of the sell off and the panic and load up on good common stocks like these.
On May 28, 1962 — 51 years ago — Wall Street suffered a mini-crash. The New York Stock Exchange average had its biggest one-day drop in over 35 years. The next day the newspapers reported:
BLACK MONDAY PANIC ON WALL STREET
INVESTORS LOSE BILLIONS AS MARKET BREAKS
NATION FEARS NEW 1929 DEBACLE
A youthful Warren Buffett was asked about the panic selling. We have rare TV footage of his reaction to the mini-crash. Watch the two-minute clip by clicking below:
Just 32 years old at the time, Buffett reacted by stating, “In the last four or five years, the stock market has been booming along, presumably forecasting better business, which has really not materialized.”
Buffett was of the opinion that stocks had gotten ahead of themselves. He was right.
Another financier extraordinaire at the time was J. Paul Getty, oil baron and America’s first billionaire. At age 70, he was considerably older than Buffett and more experienced, but expressed similar views. Getty wrote about the 1962 plunge in the chapter “The Wall Street Investor” in his classic work How to Be Rich, published in 1965.
He stated, “In my view, some stocks had been grossly overpriced. Irrational buying had driven their prices to totally unrealistic levels.”
But now that these overpriced stocks had fallen suddenly by 30% to 70%, what should investors do? Buffett doesn’t say in the interview, but Getty is clear.
He took advantage of the huge sell-off by loading up on “good” common stocks.
“I’d be foolish not to buy,” he said. “There was nothing basically wrong with the American economy or the vast majority of companies whose stocks were listed on the New York Stock Exchange.”
His formula for success in the stock market is simple: “The seasoned buys his stocks when they are priced low, holds them for the long-pull rise and takes in-between dips and slumps in his stride.”
He recommends companies that pay dividends and “cannot help but burgeon as time goes on.”
The summer doldrums are typically a good time to buy.
“Bank on the trends and don’t worry about the tremors,” states Getty.
I suspect a more mature Warren Buffett (now 82 years old) would agree.
“I buy companies not stocks,” he’s said numerous times in recent years. “If a business does well, the stock eventually follows.”
When I teach investments in college, I make Getty’s book mandatory reading. The chapter “The Wall Street Investor” is the best 16 pages on investing ever written.
Want to buy some solid companies selling less than 10 times earnings? Try IAMGOLD (NYSE: IAG), Chesapeake Energy (NYSE: CHK), or American Capital (Nasdaq: ACAS).
Mark Skousen, PhD, is a contributing editor for Investment U. Read more by Mark here.