Wall Street Hits Air Pocket – How Should Investors React? (Part 1)

Friday, May 7, 2010

Wall Street’s 1000-point air pocket produced widely divergent emotions: shock, confusion, anger, fright – and even humor. As investors, how should we react?

Clearly, we don’t want to let short-term emotions alter our long-term investment plans. Then again, we don’t want to take lightly an important event if it highlights serious risks.

We need more information

This morning we should have awakened to a complete report of everything that happened. Such a report would have confirmed what all investors need to know and believe: that the trading system is well-constructed, operates smoothly, has fully-functioning controls, is governed by wise oversight, and cannot be damaged through error or bad intent.

The “consolidated” exchange trading records and fully-automated record-keeping should have provided a full picture of what went on. And, we should have seen that the controls and safeguards prevented breakdowns, and that the oddly-priced trades we read about were simply 100-share trades that slipped through the cracks.

Instead, we are still reading about what might have happened. In addition, there are now announcements of SEC and US government investigations being launched.

So… As investors, we need to wait for a more complete explanation before knowing how we should react. I will be writing more next week. Until then, do not be overly concerned. Even if the reports reveal serious flaws, the problems can be fixed – especially in this environment.

One last item. You may wonder why I mentioned “humor” as a reaction to yesterday’s events. Two reasons. First, Wall Street is prized for its dark humor. Some of its finest jokes were created in dire times. Second, I recalled a 40-year old cartoon that shows a man, wide-eyed and mouth agape, watching television. The newscaster, reporting on the day’s stock market, says, “The Dow was hit with selling today, dropping to zero. Bargain hunters then stepped in, and the Dow closed down three points for the day.” So, when I read that an index fund, the iShares Russell 1000 Index Fund (IWB), fell from about $64 to 7-1/2 cents, then recovered to close at $62, I did chuckle.

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John Tobey on Seeking Alpha

Seeking Alpha Certified

May 2010