According to Wikipedia, panic is a sudden fear that dominates or replaces thinking and often affects groups of people. The word panic derives from the name of the Greek god Pan, who was said to have the ability to cause extreme, irrational fear. In capital markets, panic selling usually gets more attention, but we have seen cases of panic buying as well.

There is nothing wrong with selling. In fact, our firm's viewpoint is that there is more damage to come in the financial markets, and hedging your positions may be a wise idea. However, if you are not following a disciplined strategy and are selling out of fear or otherwise ill-defined reasoning, then you may be a victim of panic selling. Is the media doom and gloom replacing or dominating your thinking? If so, be careful.

Panic selling shows up on a regular basis in the stock market. Sure, in hindsight market commentators always come up with an explanation as to why investors are selling. During the actual, scary, steep sell-off, however, few investors care what the rational reasons are. For example, in the past six months there have been several massive sell-offs, with most being blamed on the ongoing credit crisis. To me, that excuse might work for the first market blow-off, but it is getting a little tired as a reason for selling. If you were panicked at the subprime mess, shouldn't you have sold in the first panic last August? Or, why didn't you sell in the second November panic? Or, maybe you procrastinated, but still, why were you still long in the January freak-out? Come, on, if you are so scared, what are you still doing being long in the market given all the recent panic?

In my view, one of the only "legitimate" phases of market panic was 9/11. That event was truly a shock, and there was a reason to be scared and a reason to panic. In addition, if you follow the efficient market hypothesis, there was no way that event could have been discounted in the market before its occurrence (unless you are a conspiracy theorist).

To highlight the dangers of panicking, and replacing thinking with irrational thoughts, let's look at some stock history: Most writers, at this stage, would trot out the market crash of 1987 and show how prices have changed since that panic. Not me, however. I am going to go way back in history -- a whole six weeks -- to show what panic can do to stocks. Selective buyers had a field day picking off panicked sellers. Take a look:

The date is Jan. 21, 2008. U.S. markets are closed (for Martin Luther King Day). The TSX plunges more than 600 points. Panic at its prime. Yet, six weeks later, the TSX is up more than 1,300 points while we are in the middle of a recession (not official, yet). Individual stock moves are even more dramatic. There are many cases where stocks have gone up more than 75% since their lows of that day.

Timminco Ltd. (TIM/TSX):

The best-performing TSX stock of last year traded at $9.95 at 3:45 pm on Jan. 21. Last week, it traded above $23. Someone scored a gain of 131% in six weeks. Did the company change in that time? Well, it did announce an expansion, which was completely expected. Oilexco Inc. (OIL/ TSX): A growing oil producer, Oilexco shares hit $9.91 on the panic day in January. They are now $15. There's another nice 50%+ gain for someone who didn't panic.

How about Noront Resources

Ltd.? (NOT/TSX.V) It

traded at $2.64 that day in January -- remember, this was only six weeks ago -- and is now trading at $7. The sellers that day left behind a potential 165% return. Sure, there was some positive news from the company on its exploration efforts during that time, but that in itself tells a message: Panic sellers -- because their thinking has been replaced by fear -- forget about the possibility of good news that can change stock prices. The point to remember is that no matter how bad you think things are in the world, there is always something that can change stock prices. At this point, of course, I could use the example of Yahoo Inc.

(YHOO/NASDAQ), where panicked

sellers sold for near US$19 on Jan. 22, only to see

Microsoft Corp. (MFST/TSX)

bid US$31 for the company a mere nine days later.

Although you would think they are less susceptible to panic, value stocks can get hit just as hard as growth stocks in a panicked environment. This really and truly makes no sense, as value stocks tend to have solid cash flow and asset support for their share prices. Still, in our referenced day we saw Methanex Corp. (MX/ TSX), trading at eight times earnings with $500-million c ash on its balance sheet, trade down to $22, and Hudbay Minerals Inc. (HBM/TO), with $700-million in excess cash and at seven times earnings, trade down to $14.30. In just a short six weeks, they are up 27% and 35%, respectively.

peter@sprott.com

-Peter Hodson is a senior portolio manager at Sprott Asset Management.