A Hedgehog Commentary

Black Monday: 10 Years Plus A Week

10/27/97 - So, do we call today Bloody Monday, or Stormy Monday, or just plain Lousy Monday. As you probably all know, the Dow crashed more than 550 points while the NASDAQ dropped 115. Tech stocks and health care stocks were hit even harder, with many racking up +20% drops. Even the drilling services sector wasn't immune; Hedgehog pick Norton Industries dropped +20% as well. Brazilian telephone ADR Telebras kept dropping even in the middle of an upgrade by one analyst.

Is all this the start of a full scale market crash? I wish I knew. Certainly the market is not making an orderly retreat. If panic sets in, the drop could go on. However, the fundamental shape of the US economy has not changed so much that a massive across the board correction is justified. Even the Asian economies are not so bad or so devasting to US companies as to justify such a drop.

There are of course three distinct possibilities for where things go next. One, panic could set in and the crash could continue. Two, investors could start to see bargains and begin buying, pushing the market close to what it was; or three, the market just stagnates along for a while drifting either higher of lower.

Regardless of which of these three things happen, eventually, the market will recover, maybe sooner, maybe later. Before taking any action, we recommend evaluating your stock based on its current price, PE, and potential earnings growth. If the stock is now at what you consider to be a good price, you probably shouldn't sell it. It may be too late to salvage anything by selling now and you'll miss a possible recovery. If you don't consider the stock to any longer be at a good price, either because it had already risen to inflated values to begin with or because market conditions have changed with respect to the company, then you may want to consider getting out.

The same logic should apply to deciding whether to buy now. A number of companies in the chip equipment sector have dropped more than 50% in the last few days (including one the Hedgehog owns, CFMT). Other sectors have also been pummelled. There are probably some good values out there, but be prepared to hold them for a while. Just because a stock is undervalued doesn't mean it can't become more undervalued.

The important thing is not to make your decisions out of a sense of panic. Just remember, if you are a long term investor, in the end, things should work out fine. And if you're a short term investor? Well, you know the old saying, 'You puts your money down and you takes your chances'.