12 August 2011 - Patience, not Panic is the Key

A reader fired off an e-mail to me last week, using some language that I can’t share in this column, but his question basically was “What is going on in the marketplace?” I fired off a one-word response. . . “volatility!”

Volatility has always been in the marketplace, whether it is Wall Street or in commodity trading in agriculture, and yes, it is increasing. There is no question in my mind that as we have moved from strictly trading in the pits by human beings, to now trading electronically with computers around the world directing much of the trading, volatility has increased. Add to that several 24-hour TV business news channels with dozens of business “experts” expressing their opinions on why the market is up or down sharply and it all leads to confusion which leads to uncertainty which leads to fear and pushes people to make decisions and take actions they ought not take.

That was driven home to me in several e-mails that read like this... “What is happening to my retirement fund, my 401K? I am so frightened by this 600-point drop in the Dow that I’m selling my stock and getting out of the market until things calm down.” That is the worst thing an investor can do; panic selling, which over the years I’ve seen happen many times on Wall Street as well as in grain and livestock futures markets. We certainly saw it this month when after a 600-point drop in the Dow, the market recovered more than 400 points the next day, leaving those who sold Monday with a large (and real) loss in their retirement fund.

That same week we saw the ‘limit up’ move in corn futures following the August Crop Report, and I talked to some traders who bought at the top because they knew the corn price would go higher. Perhaps it will...eventually...but the next day the price went down as other traders thought, we have a long way to go before the crop is in the bin and a lot can happen between now and the end of harvest. That makes for volatility and it is not going away.

Some things to remember, Number one, try to stay calm, don’t sell in a panic market, don’t join the ‘leming parade’ and follow the leader over the cliff; Number two, and you have heard me say this many times, “Prices never go the same way forever. There is always a price correction.” That is the one lesson I have learned in my half-century of covering markets and is the only prediction I can make without fear of it being wrong.

My thoughts on Samuelson Sez.