Last month, I spent some time in San Juan, Puerto Rico. One day, we visited Old San Juan, the oldest settlement within the territory of the United States, with a history that begins in 1508. We also visited the old fort known officially as El Castillo San Felipe del Morro, or simply El Morro.

The fort must have sent shivers up the spines of all those who hoped to take it. The walls of El Morro are 18 feet thick and 145 feet high. Built on a headland, the Spanish Empire controlled the flow of goods in and out of the New World from here. El Morro has been tested many times. Even today, you can walk in the oldest tower in the fort, built in 1539, and see shell fragments in the ceiling that date to the 1898 bombardment of San Juan by the U.S. Navy during the Spanish-American War.

El Morro is a testament to the idea that in war, some things have not changed since Joshua gazed upon the walls of Jericho, or since Pericles sent the Athenian fleet against Sparta.

In investing, too, there are some things haven’t changed since those 24 brokers met under a buttonwood tree and started what became the NYSE. Buying low and selling high works in all markets. But this is easier said than done. As James Grant, editor of Grant’s Interest Rate Observer, points out in a recent letter: “We human beings only say we like to buy low and sell high. Our every instinct is to do the opposite. Rock-bottom prices only seem low in retrospect. At the time, they seem frightening because of the very reasons they are cheap.”

Such a time is now. And it is a sign of the kind of panic we are in. The investors who loved stocks one year ago when the Dow was hitting new record highs are the same investors who are now afraid to buy stocks, even though they are half the price they used to be. Successful investors buy when stocks are cheap and falling. Unsuccessful investors merely panic.

Let me tell you a little story that illustrates the point…

In July 1986, John Mendelson, a strategist at the brokerage firm Dean Witter Reynolds, was out fishing with his son. For whatever reasons, he decided the market would drop. And on Monday morning, at the next strategy meeting, Mendelson convinced 60 stockbrokers it was time to sell.

After the meeting, they rushed for the phones. (This was in the old days, before the advent of BlackBerries and the Internet.) Before long, the sell order rippled through some 600 institutional investors. The Dow Jones industrial average fell 62 points. This was back in the days when the Dow was barely 1,900. So it was a significant drop.

Lars Tvede tells this story in his The Psychology of Finance. It’s meant to show how one man could precipitate a meaningful drop in the market. It seems arbitrary, and it is. An investor in 1986 might’ve fretted at seeing his stocks in the red, but he shouldn’t have. The sell-off had nothing to do with his investments as much as it did with the hunch one man got while fishing.

Economist Robert Shiller has done some interesting work on the reasons people sell into declines like that one in 1986. In September, the market had another drop of 87 points. Shiller asked hundreds of institutional investors and large individual investors for reasons why they bought or sold during these times. Out of the 113 replies he received, none sold for any economic news or fundamental reasons that the press pointed out after the fact. Instead, “What was emphasized most,” Tvede writes, “was the market’s drop itself.”

After the big 1987 crash, Shiller sent out thousands of questionnaires. Again, the results were the same. The overwhelming reason investors sold was because the market was down.

This reminds me of that old Chinese saying that one dog barks at something and a hundred bark at the bark. Don’t be just one of the dogs that’s barking at the bark.

Source: Buy Low…If You Dare