When the stock market's startling drop last week canceled out a year's worth of gains, veteran money managers kept their cool.
In fact, many viewed the downturn as an opportunity to go bargain hunting for undervalued stocks.
At the same time, they encouraged their younger colleagues -- many of whom never had experienced a correction -- to stay calm, maintain a sense of humor and, of course, keep a long-term perspective.
Their stories follow:
Now is the time to increase equity allocations, unless you're "desperate and can't sleep nights," believes William Fouse, cofounder and chairman of the executive committee at Mellon Capital Management, San Francisco.
The quantitative, value-based asset allocation model he developed 25 years ago is showing that stocks are at least fairly valued, if not undervalued.
In 1973, that model showed stocks were overvalued and recommended only a 10% equity allocation. Similarly, before the 1987 crash, the model indicated only a 20% exposure to equities.
"You betcha that we followed those models," Mr. Fouse said.
Mellon uses the model to manage a $5 billion Vanguard Group asset allocation fund and $20 billion for Mellon's pension fund clients.
"The model looks at the expected rate of return for stocks vs. bonds over a 10- to 20-year period. It's been showing that it would be prudent to increase equity exposure above the normal 60% rate to a range of 70% to 80%."
Mellon followed the model this time too, even before stocks started to falter, he said.
A confluence of events has disturbed investors, Mr. Fouse said. "President Clinton's problems all by themselves are not enough. Boris Yeltsin's troubles by themselves aren't enough. The problems in Japan all by themselves aren't enough. But investors are taking it too far."
Mr. Fouse is certain the market will recover. He believes investors' fears are out of proportion to the effect the troubled foreign countries have on the U.S. economy.
"Even though more analysts have been reducing their long-term profit forecasts, it's inconceivable they would trim them so much that equity returns would become unattractive in comparison to the rate of return from bonds . . ."
Keep your sense of humor, Katherine Busboom Magrath advises money managers living through their first down market.
Ms. Magrath, chief investment officer at ValueQuest Ltd. LLC, Marblehead, Mass., worked as a portfolio manager at Keystone Custodian Funds during the 1973-74 bear market.
"It's also important to keep some powder dry. That way investors have a chance to dollar average," she said.
Stocks can look very cheap, but the market can push them down more. That will prompt other investors to panic and sell, she said, which can create long-term value.
Such selloffs offer a great chance to upgrade in quality, Ms. Magrath said. "We have increased our holdings of some large-cap stocks that were very depressed, after earlier eliminating weaker stocks because they had greater price risks."
She acknowledges it's easy to get swept up by what's happening every day in the markets: "It's not fun to do the best job you can, and still lose money every day." Still, she believes it's essential to maintain a long-term perspective.
To her, the bear market of the 1970s was much more brutal than the current correction.
"The '70s downturn went on and on for almost two years. It never had an end," she said. "A lot of people in the business had nervous breakdowns. Many left the field altogether and went into other professions."
"I say to investors, don't sell. But don't buy either," advises Edgar Peters, chief investment strategist at PanAgora Asset Management, Boston.
He's waiting for the market's price-earnings ratio to fall to an average of 15 to 20.
"It's been between 22 and 26, which makes valuations very high from an historic standpoint," he said. "Stocks have only been cheap recently relative to their overvaluation."
Mr. Peters, a value investor and admitted contrarian, has been practicing what he preaches, remaining on the sidelines and investing only 20% of his firm's assets in stocks. The rest is in fixed income.
He sees the economy slowing, which means consumers are likely to reduce spending, which could slow the economy even more. The market is not priced for a recession, though, but is overpriced for what's going on, he said.
GLICKENHAUS: TRY BONDS
Seth Glickenhaus, chief investment officer, Glickenhaus & Co., New York, believes the market has nearly bottomed out. But he recommends bonds for investors who believe this is a bear market.
His firm, however, did not switch into bonds, Mr. Glickenhaus said, because it didn't foresee the downturn in time.
"We moved into bonds in the '70s bear market, because we saw it coming early. We got hurt (then), but not that badly," he said.
Susan Byrne, chief investment officer of Westwood Management Corp., Dallas, is buying on the dips.
"People get scared and throw out the baby with the bath water. It creates opportunities for stock pickers like us," she said.
Ms. Byrne believes the stock market is undervalued by 15%, based on the current mix of modest growth and low inflation.
Last week, Westwood added to positions it likes in undervalued sectors, such as food, electric and telephone companies -- sectors that have been doing well.
It's tough to say "where the leadership will come from at this point," she said. But, "as far as we're concerned, it's the small-and midcap stocks that are undervalued now, while large-cap stocks are still overvalued."
In the '73-'74 bear market, nifty-fifty stocks such as Xerox Corp., Polaroid Corp. and Avon Products Inc. never really came back, Ms. Byrne said. Instead, the leaders of the bull market that followed were the small domestically oriented companies. Now she is watching to see whether there will be a change from the current leaders -- Dell Computer Corp., Microsoft Corp. and Merck & Co. Inc.