Why Investors Shouldn't Panic Over Japan

Since a devastating earthquake and ensuing tsunami struck Japan last Friday, investors have been dumping Japanese and U.S. stocks in what can only be called panic selling.

In my view, this is a big mistake. I'm sticking with my disciplined buy-sell strategy, looking to snap up shares of U.S. stocks--and even Japanese stocks--if conditions merit.

Many years ago I bought a one-bedroom condominium in New York as an investment and rented it out. My tenant for several years was a sushi chef from Japan. The rent check arrived each month a week early. He spoke little English, but every December he sent me a Christmas card, carefully hand-written, thanking me for the privilege of being my tenant. I can't say whether he's typical of his fellow countrymen, but he left me with an indelibly positive impression of the Japanese.

I have been thinking of him this week as Japan teeters on the brink of nuclear catastrophe, still reeling from the earthquake disaster that so far has taken the lives of more than 5,000 people and left thousands more still missing. These calamities follow a decade of economic stagnation and declining morale as China overtook Japan as the world's second-largest economy.

Now, in the wake of what some are calling the greatest tragedy to strike the nation since the bombings of Hiroshima and Nagasaki during World War II, fears have spread rapidly to markets around the globe as jittery investors sell stocks in search of safer havens.

Panic should never be a reason to sell anything. The question is whether whatever caused the panic justifies taking immediate action. As with many events that are both enormously complex and uncertain, it takes some humility to acknowledge the truth, which is that we simply don't know. Even experts have been rendering conflicting views on the seriousness of the nuclear threat and potential economic disruption.

Speculators, of course, are having a field day. I've heard all kinds of advice: Buy the severe drop in the Japanese market; short Japanese government bonds; buy puts and sell calls on Japanese index funds; short nuclear power-focused companies; buy coal; go long U.S. utilities.

I'm ignoring all of it. Professional traders and money managers have no choice but to react to world events--no matter how tragic--and try to make money from them. That's their job, and they provide a service to their clients, as well as liquidity for people on the other side of the trades. The Tokyo stock market has stayed open throughout the crisis, providing a market for people who panicked and wanted to sell. But as individual investors, responsible to ourselves, we have no obligation to trade on the Japanese crisis.

I was impressed this week that Carnegie Hall went ahead with its festival celebrating Japanese music and culture, but canceled a panel on Monday that was going to focus on "innovating and profiting" in contemporary Japan. "All of us felt, as a topic, that wasn't what you'd want to be talking about right now," executive and artistic director Clive Gillinson said.

I feel much the same way. I'll stick to my program for buying and selling. If world markets continue their decline and the Nasdaq hits my buying target of 2550--a 10% decline from its recent high--I will buy stocks, as I would in any event. I might even buy a Japan index fund or Japanese stocks. I don't currently own any, although I'm sure many Japanese stocks are represented in my broad international index and mutual funds.

The enormous courage shown by Japanese workers at the stricken nuclear plants has only increased my respect for the Japanese people and their resilience. In the wake of World War II and a devastating nuclear attack, Japan undertook the economic transformation that made it until recently the world's second-largest economy. I hope it emerges from this tragedy, too, with a renewed sense of purpose and ambition.