In his Hidden Values Alert, value investor Charles Mizrah discusses three rules for “thriving during a panic”. This in-depth, common sense review is must reading for serious investors.

“Warren Buffett once said, ‘You don’t know who’s swimming naked until the tide goes out.’ In the past year the tide was rapidly going out, and it exposed a lot of naked swimmers.

“The impact of the credit crunch continued to find its way into other asset classes. Correlations that investors held dear, namely that price movements in one global market would behave differently than price movements in another global market, became unglued.

“The past year has seen global markets move in lockstep with each other, providing investors no safe haven.

“Investors couldn’t even hang their hats on diversification among different sectors. It is during periods of panic that all markets and sectors correlate in the same direction…down. Investors both institutional and retail acted in a similar manner: they froze.

“They began to sell assets, many times without regard to the underlying value of the asset. In order to raise cash for redemptions, hedge funds sold what they could, not always what they wanted.

“When stock market participants focus on the short term, employ leverage and need to liquefy their holdings, the table is set for the value investor.

"Indeed, it is during times of panic that value investors plant the seeds of future market-beating returns. While most investors are caught like deer in headlights as great companies are offered at bargain prices, value investors act.

“Benjamin Graham, the father of security analysis, laid the framework for how to view investing in stocks. He said that you should view stocks as pieces of a business, take advantage of the stock market’s fluctuations and invest when you have a margin of safety.

“Keep the following in mind and you will truly see that market sell-offs should be viewed as opportunities and not reasons to sulk.

1. We’ve seen this movie before.

“Financial panics in the United States didn’t start in 1929 when the country sank into the Great Depression. Prior to the 1929 crash, there were 10 financial panics, beginning in 1792, that had a great impact on Americans, were dramatic and involved neglect by others.

“In the past two decades we’ve lived through Black Monday (stocks fell 22% in one day), the 1997 Asian Financial Crisis, the 1998 implosion of Long Term Capital, the dot-com crash of 2000 and now the subprime mortgage crisis.

“While each panic was different, it pays to keep in mind Mark Twain’s observation that ‘history doesn’t repeat itself—at best it sometimes rhymes.’

“In spite of close to 20 panics in the past 200 years, the standard of living and gross domestic product of the U.S. have continued to march higher.

2. Act short term but think long term.

“When sellers are forced to sell stocks at prices that are below the underlying worth of the business, value investors should be smiling ear to ear. It’s not very often that great companies go on sale, and when they do you should be a buyer.

“While over the short term stock prices may fall even lower, eventually the stock price will most accurately reflect the intrinsic value of the business.

“Graham said that those who view the market as a voting machine—stock prices driven by popularity—will be in a better position to take advantage of periods of stock market extremes.

3. It’s Wall Street, not Main Street.

“Much of the gyration that stock prices exhibit over the short term have little to do with the fundamentals of the company. Falling prices, especially on a short-term basis, should be viewed in the context of the company’s fundamentals.

“Over the long term, value-priced fundamentally strong companies will continue to increase the underlying value of their business in spite of headline-grabbing news events that cause stock prices to slide over the short term.

“Take advantage of financial panics and view them as opportunities to establish holdings in great companies at discounted prices.

"So long as investors freeze up during times of financial panics and sell their holdings at any price, value investing will continue to remain a rational and low-risk approach to successful long-term investing.”