Stock investors lose their heads again

But just as markets rarely rise so fast, so suddenly, the opposite is also true. The market as a whole hardly ever takes a quick, breathtaking plunge as it did after Sept. 11.

When it does, that's usually an opportunity to buy. Every once in a while, investors are presented with what can be called a "no-brainer" chance to pick up shares cheaply.

Last year, the TAIEX fell 8.3 percent over three days after investors were frightened about what China might do in response to the likely election of Chen Shui-bian (陳水扁) as president. A week later, the market had recovered those losses, and then some.

The year before it was former president Lee Teng-hui's (李登輝) comments that relations between China and Taiwan were "state-to-state" in nature. The market fell by roughly 20 percent in one month, but recovered most of those losses in another month's time.

Time and again the truism proves itself: Investors often overreact to news events that have little bearing on the market's fundamentals, leaving shares greatly over-sold. But eventually those gains are recovered, usually within a short amount of time. It took about a month for the TAIEX to reach its pre-Sept. 11 levels.

Investors in Taiwan -- and around the world, for that matter -- overreacted to the events of Sept. 11 even though it wasn't clear what impact the attacks would have on the bottom-lines of companies operating in Taiwan.

Had investors bought after the plunge, they would have been well positioned to take advantage of the eventual comeback and last week's run. The best times to buy and sell may be when investors are behaving irrationally.

While investors' irrationality makes it difficult to predict what the market will do when stocks are rising -- will shares continue to climb, or will investors come to their senses? -- it's far easier to decide what position to take when stocks are falling for the same reason.