How I Keep My Sanity While My Savings Vanish

In this first of a series on coping with a plunging stock market, the editor of <i>Kiplinger's Personal Finance</i> reveals how he is turning disaster into opportunity.

For me, the panic of 2008 became personal in the last week of September. The bottom seemed to fall out of everything I owned. In two weeks' time, my little pot of gold inside TD Ameritrade went from a 4% gain for 2008 to a 25% loss. I was paralyzed by the suddenness of the descent-it's like watching your arm being sawed off, except that psychological ache replaces the physical pain.

Then I got to thinking. How many times have you and I read that the seeds of great fortunes are planted in the midst of terrible bear markets? You know, buy when there's blood in the streets.

They are almost clichés. But on October 6, when the Dow Jones industrial average melted more than 800 points during the day, I became a believer. Mr. Market, who is usually so reasonable and all-knowing, had gone mad. My dozen stocks were being executed.

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So I vowed to rescue them. What I realized was that some people -- probably hundreds of frantic hedge-fund managers whose investors wanted all their money back -- were dumping everything they owned, with no concern about the prices their stocks fetched.

I thought to myself: Don't just sit there and mope, you idiot. These are the steals of a lifetime!

In an Excel spreadsheet, I listed each stock I owned, its latest price and the median earnings estimate of analysts for 2008, 2009 and 2010. (You can find earnings estimates on Yahoo Finance or MSN Money.) Then I created columns linked to these numbers, to show me the price-earnings ratios for all three years. And what I saw was that although almost every stock I owned was increasing its earnings handsomely, their P/Es had been compressed beyond belief.

Take Potash Corp. of Saskatchewan (symbol POT). The potash it mines becomes fertilizer on farmers' fields. With crop prices at or near record highs, farmers cannot buy enough of the stuff. Even though there was no sign of a let-up in demand, POT had plunged from $185 on September 22 (and a high of $242 in June) to less than $80 on October 6.

Nothing fundamental had changed for Potash. Was the market forecasting a plunge in sales? I saw no evidence.

We haven't repealed the ethanol requirement for gasoline that has farmers planting corn from fencepost to fencepost. Corn futures prices remain strong.

People don't eat less in a recession. Worldwide, grain stocks are near record lows. With earnings estimates above $20 a share for 2009, this stock looked like a ripe orange ready to be plucked from the tree.

So down my list of stocks I went. For each one, I asked whether I would buy more. With three stocks the answer was no, so I sold them to raise more cash.

For the others, I jotted down the price at which I'd buy more and how many shares I'd likely buy. This last bit is tricky. If you exhaust your cash hoard and prices keep going down, what next? So buy in little increments, I decided.

When I finished this exercise, I had an amazing sensation. Instead of feeling depressed as my savings melted, I felt excited-liberated, almost. Mr. Market, go down, down, down, please, and take my stocks with you.

Initially, Mr. Market didn't oblige me. Yes, the market went down, but for several days all my stocks went up, Potash in particular. Then on October 9, toward the close of the session, the Dow industrials fell like a stone-679 points this time. Kansas City Southern (KSU) dropped below my target price of $30, and I bought another 100 shares.

Coal company Massey Energy (MEE) breached my $22 buy price, but I missed it by bidding $21.50. That's okay.

It appears Mr. Market is still out of his mind as the hedge-fund boys throw more portfolios to the dogs. Maybe I can double up on Massey tomorrow at $20. This really is fun. You should try it. You'll feel great.

Editor, Kiplinger's Personal Finance