The assumption is that the market will turn around, and anybody who buys into Japanese companies stands to make a lot of money. If this is the case, then why are the prices going down at all? Are other investors really that ignorant?
Both buying and selling may be the correct play depending on your current position.
These aren't rhetorical questions, this is just my line of thought based on my relative ignorance of investing.
So there we have perfect information about the stocks' long-term performance, but two situations in which both buying and selling the same stock is wise, or at least understandable.
Contrast that to hedge funds, investment banks, and other investment groups that have investors to please and targets to hit in the immediate/short term. For them, their time horizon is shorter and 1) they need to free up cash and 2) they cannot take the risk of holding on because the economy is definitely impacted in the short term.
Let's put this in perspective. The Nikkei is down 80% over the past 21 years. At an optimistic rate of increase of 6% from now, it will be another 25+ years before it hits 38957 again. All up, over 45 years.
Have a look at Shiller's house price graph. From 1890 to 1955 there was zero real increase - and large falls in the meantime. This is 65 years. Again long term is very long term. Same in Australia by the way. The USA and Australia of the most prosperous and successful economies in the C20. Others did far worse.
This "in the long run all will be well" argument just doesn't hold water. Not if you have a human life span.
See for more on this "The Big Investment Lie: What Your Financial Advisor Doesn't Want You to Know" by Michael Edesess. Everything a financial planner tells you may be a self-serving lie.
Aha - there's our problem!
When Steve Jobs announced his medical leave just under two months ago, the Apple (AAPL) price opened the next day (Tuesday) down 5.44% on Friday's close price. The low point on Tuesday was 6.45% lower than Friday's close price.
While the price did go back up a bit that same day (the Tuesday close was only 2.25% lower than Friday's close price), it kept dropping for a few days. By the time the markets closed on Friday, AAPL's price was 326.72, down 6.24% in a week (compare that Friday close price to AAPL's lowest price on Tuesday, which was 326.00).
For some reason, investors were selling Apple stock because of fears over Jobs. This seemed ridiculous to me, and sure enough, in the (nearly) two months since then, the market has shown that I'm not alone in that view.
If you bought AAPL stock at that Friday closing price and sold right now, you'd be selling 8.21% higher than you bought. Even if you didn't time the buying quite as well, so didn't get it at such a low price, if you bought it at the opening price on Tuesday (the day after the Jobs announcement) you'd have made 7.30% profit, or if you bought it at the closing price on that same day and sold now, you would have made 3.79% profit.
So even with pretty shit timing on when to buy, just by having faith that Apple stock would bounce back, that's a very healthy rise in value over just two months.
The cause (I think) of the problem is two-fold. For starters, people are afraid that, if they buy back in too early, they will be too far ahead of the market and prices will continue to drop - obviously, they're hoping to be just a tiny bit quicker than the market, buying just before prices start going back up again quickly.
The second reason is basically the same, but with a different approach. Rather than wanting to avoid having your shares devalue immediately after buying them, it's a case of not wanting to buy back in too soon because, the lower the price you pay, the bigger the return once they have bounced back.
There is a legitimate concern, that without Jobs to supervise things, in a year or two, the "magic" of getting the right product out at Apple would be gone.
Sure, Apple would still be making money, because Tim Cook is a great COO, but the "vision" would slowly fade.
Remember, when you are buying Apple stock you are paying a premium on the expected growth. in a year or two
So yes, the market was pricing that possibility, but it was obvious that in no time at all it would forget about it and go mad over the Apple's short-term future. Sure enough, it did.
Many people who are levered don't have the capital to withstand this type of drop and get washed out causing further selling.
It's a chain reaction that eventually cools off. Let's hope their fuel rods do the same!
This can be true, but remember that you don't know where the sell orders are placed. We could have already seen the trigger and the corrpesponding drop-off.
Also, remember that many investors believe this, so they put buy triggers below where they think sell triggers are. Also, there are value investors who place buy triggers without regard to the existence of sell triggers.
I'm not saying that the phenomenon you describe does not exist here, and I acknowledge it has happened in the past. But you need to qualify axioms like that to see if they apply to new situations.
Full disclosure: I made a small-but-quick profit on the Nikkei today.
I think the LessWrong post Markets are Anti-Inductive explains it well: http://lesswrong.com/lw/yv/markets_are_antiinductive/
Only half of them are selling; you can't sell unless you can find someone who'll buy at the price you want ;)
Right now a lot of the losses are due to uncertainty, people are factoring in risks of the unknown, potential worst case scenarios etc. If you buy in expecting the market to go back up, you are essentially betting the situation won't end up as bad as feared right now.
Another sad fact of this disaster is that it disproportionately affected the retired -- this too may well have consequences economically.
Economics is in part about people having productive stuff to do. If there was a work shortage in Japan before, I doubt there is now.
The market as a whole may be rational, but individuals in the middle of a tense situation probably won't be.
That said, the "efficient market hypothesis" of which you speak; that is, the idea that any and all future price rises and falls have already been factored in - is false.
Many investors _are_ ignorant. Many are stupid. Many are prone to panic. They are prone to everything that all other humans are prone to. Many are in fact big funds that have preset automated buying and selling positions and would happily buy and sell regardless of what else is going on.
As evidence, I point to every bubble and crash there has ever been.
More importantly, outside events or circumstances could mean there isn't money in the right place to be able correct market price mistakes.
By buying the panic, in effect you are selling out "of the money put options" to the rest of the market. In effect you are selling insurance policies saying things are not worse than they look. The performance characteristic of selling OOTM options is that most of the time you make money. But...
Once in a while you lose your shirt. Ask Victor Niederhoffer. What is there is a catastrophic meltdown and Tokyo has to be evacuated? What will the Nikkei be worth then? What about all the people who bought dot.com stocks after they fell 50% because they were "cheap".
When considering the merits of investment, it is worth asking:
1. Am I selling insurance to someone without realizing it?
2. Does my strategy amount to nothing more than leverage? Leverage works well in rising markets and works very badly in falling markets.
3. Are there hidden risks I am not aware of but someone else is? Or as Buffett puts it, have you been playing poker for an hour and still haven't worked out who the patsy is? (It's probably you).
4. Are you taking uncompensated risks like putting 1/3 of your net worth into one company when you could be diversified for no cost?
On the other hand out of the money put options have a limited upside.
Japan has had a crap economy for a generation, and this disaster may result on them being on a whole new course with massive upside.
-- Warren Buffett
also, as others have pointed out, your circumstances may differ from others'.
It depends on how bad the news really is, e.g. how damaged Japan's infrastructure actually is, as a whole. You need to judge this with facts, not on what other investors do, efficient market hypothesis notwithstanding.
FWIW, I don't know enough of the facts to make a decision. I do have a feeling that the Japanese people will rebound vigorously, as they did after WWII.
So faced with the prospect of fiscal apocalypse or (I had friends pulling money out of banks) the buying opportunity of the century, I bought a bunch of equities that were punished by the collapse, and made a bunch of money.