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Panicking When the Stock Market Is Down
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Stocks are generally more attractive when no one else wants to buy them, not when barbers are giving stock tips. It's very tempting to look for validation — or other people doing the same thing—when you're investing, but history has shown repeatedly that assets are cheap when everyone else is avoiding them. (In the "words of Sir John Templeton, one of the first investors to systematically scour foreign markets for bargains, "The time of maximum pessimism is the best time to buy")

The most famous example of this is a BusinessWeek cover story from the 1979 that asked the question, "The Death of Equities?" not long before the start of an 18-year bull market in stocks. 1 More recently, Barron's featured Warren Buffett on its cover in late 1999, asking, "What's Wrong, Warren?" and bemoaning Buffett's aversion to technology stocks. 3 Over the next three years, the Nasdaq tanked more than 60 percent, and Berkshire Hathaway shares appreciated 40 percent.

We also see empirical—rather than anecdotal—evidence of this in a study that Morningstar has conducted every year for the past several years, in which we look at the performance of unpopular funds. After looking at which fund categories attracted the most money and which categories experienced the strongest outflows, "we found something very interesting. The asset classes that everyone hated outperformed the ones that everyone loved in all but one rolling three-year period over the past dozen years.

The difference can be striking. For example, investors who "went "where others feared to tread and bought the three least-popular fund categories at the beginning of 2OOO would have had roughly flat investment returns over the subsequent three years. That was much better than the market's average annual loss of about IJ percent over the same time period and miles ahead of the performance of the popular fund categories, which declined an average of 26 percent per year during the three-year period.

Going against the grain takes courage, but that courage pays off. You'll do better as an investor if you think for yourself and seek out bargains in parts of the market that everyone else has forsaken, rather than buying the flavor of the month in the financial press.

'For better or for worse, then, the U.S. economy probably has to regard the death of equities as near-permanent condition—reversible some day, but not soon" from "The Death of Equities," BusinessWeek, p. 54 (August 13, 1979).

'Andrew Bary, "What's Wrong, Warren ? Berkshire 's Down for the Year, but Don't Count It Out," Barron's, p. 16 (December 27,1999).

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