Evan Newmark had a very appropriate article today over at Deal Journal about the nature of panics in the financial markets.  It is appropriate for two reasons:  first, Mr. Newmark is a smart and experienced veteran of the financial world, including all of the blood the markets can shed; and, second, because it seems like panic is driving a little too much of the daily volatility and general market activity.

This isn’t an empirical analysis on how ”panic-centered variables” are affecting intraday market data.  This is just a general observation, in response to the constant media reports, pundit claims and investor skiddishness, all of which I think are only making things worse in this already struggling market.  To be honest with you, I am getting tired of the panic sentiment, yet I don’t believe the struggles are over  yet. 

Here is what I do believe … first, I think that even though there is still a significant ways to go until the economy and markets fully turn to the upside, we’ve seen the worst of it and have already passed through the thickest of the muck. 

Second, I believe that while a good portion of the concern is completely valid, the majority of the panic that investors (professional and ameteur alike) are expressing is unwarranted.  I think much of the panic is being driven by media reports and general short-sightedness. 

Thirdly, I know that a lot of people did very well in the past seven or so years, since the markets recovered from the dot-com bust.  However, now that we’re finding ourselves back in a challenging time, many of these same people have no clue what to do with themselves, and ultimately they are making bad decisions. 

Finally, even though I do not believe we are in an official recession, we are undoubtedly experiencing an economic downturn; however, this downturn is different from a bubble bursting or event or sector-centered declines.  The negative market and economic conditions we are currently experiencing derives from a culmination of poor leadership, financial mismanagement, lack of enforcement of regulatory controls, inadequate monetary policy, umanaged risk and a general loosening of the manner in which debt has been used.  The past five years have very much been “fat” years; however, we failed to store for the “lean” years, so the current economic downturn represents a “perfect storm” of negativity and poorly planned preparation of outcomes that did not take a dream interpretor to see.  Simply put, we were all too focused on living the “fat life,” to the point where we totally neglected the warning lights that were flashing bright red in our faces.  Why?  Perhaps we were too fat to see it.  Maybe we were too arrogent and felt invincible.  Or perhaps we were just in denial and didn’t want to see the writing on the wall.  Whatever the reason, we missed it, and the blood is beginning to flow in the streets as a result. 

That all sounds very apocalyptic; however, Newmark’s article is right on target, in terms of how we should be responding to the current market struggles.  Instead of freaking out, could we possibly prepare ourselves in a way that will keep us focused on getting through this obstacle course?  Perhaps there are some solutions for keeping the crosshairs on the long range target.  This is what Newmark is talking about and he’s coming from an experienced viewpoint.  He makes five recommendations that ultimately allow us to see beyond the day-to-day panic that tends to consume those of us who spend our days consumed by the markets (it’s really a vicious cycle of negative information flow). 

It is in situations like these that young investors like myself turn to the “old guard” to learn more about how they dealt with situations like 1929, 1987 and 2001, because even if the details of the situations are different, the economic fundamentals allow us to compare what really are similar scenarios. 

I also like hearing/reading different peoples’ comments on the situation, because it seems that each person attempts to break it down a different way.  Some people look at the economic fundamentals.  Some consider the day-to-day opportunities that come up within the increased volatility trading environments.  Other folks stay focused on Graham’s fundamentals of value investing, stating that  declines will have to eventually turn and “we’ll just have to wait it out.”  Finally, some folks just like to comfort themselves by picking a sector to stick to and harp on until it either makes or breaks them. 

Whatever the outlook you have, the general strategies for weeding through the panic is very valid.  Whether your focus is long-term value investing where you’re trying to find the market bottom (I picture a blind person digging a hole looking for a gold nugget) or you’re planning to day trade your way out of the negative performing market, we have to be able to wade through the blood flowing through the streets, because one thing we can all be sure of is that the volume of blood will only increase and even once it goes away, it’s only a matter of time until it returns.  It doesn’t get any more fundamental than that.