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Learn from 1987, stay invested and don't panic during this market chaos

People walk by the New York Stock Exchange (NYSE) before the Opening Bell on February 6, 2018 in New York City
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People walk by the New York Stock Exchange (NYSE) before the Opening Bell on February 6, 2018 in New York City

The most important lesson to be learned from the three-day market correction – that sent the Dow Jones industrial average down some 2,100 points at one point on Tuesday and nearly nine percent from its recent highs – is to understand that it is healthy, normal and welcome.

It is also long overdue. What has not been healthy, or normal, has been the sentiment that has emerged in the past 15 months that Donald Trump is some sort of magician presiding over a stock market that only seems to go in one direction: straight up.

So-called market experts are positing lots of reasons for why the stock market started to crack last Friday. Among them: the end of cheap money, as interest rates around the world begin to rise; a pick-up in inflation as unemployment continues to fall and wages begin to increase in order for businesses to continue to attract the employees they need; the fact that expected tax benefits have already been baked into the market's rise; a fear that there were asset bubbles everywhere you look, whether it be bitcoin, high-end Manhattan real-estate or fine art; and the thought that all the traders who bet that volatility would continue to be benign were getting their heads handed to them and have been forced to take their losses.

There are plenty of logical reasons to go around to explain the last three days of trading but the most compelling, for me anyway, is Occam's Razor: It simply became time for the pressure building up in the stock markets to be released.

Since March 2009, two months after Obama took office in the wake of the worst financial crisis in generations, the Dow quadrupled to its peak of around 26,600 from its near-term trough of around 6,500. Nine years of a bull market is a long time by any historical measure. In the first year following Trump's election, the Dow rose 28.5 percent. And it kept on increasing another 13 percent or so in the past few months, until it reached its all-time high on January 26.

So, yes, for the last 10 days or so, the market has been in a corrective mode. It is down some 8.5 percent since its late January peak. But it's important to keep the decline in perspective – and to not panic.

We are light years away, in prescriptive terms, from the one-day collapse of 22.6 percent, which occurred on Black Monday 1987. That was a genuine panic, as I saw myself, with grown men huddled around their Quotron machines – desktop real-time quotes were still years away – with tears streaming down their faces as they contemplated the extreme loss of wealth they were experiencing.

A trader (c) on the New York Stock Exchange looks at stock rates 19 October 1987 as stocks were devastated during one of the most frantic days in the exchange's history.
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A trader (c) on the New York Stock Exchange looks at stock rates 19 October 1987 as stocks were devastated during one of the most frantic days in the exchange's history.

But even that one-day financial disaster turned out to be a blip in retrospect. The better choice that day – as it will probably be this time around, too – is to stay invested in the stock markets – to not panic and sell. But rather to recognize that, as they say on Wall Street, "trees don't grow to the sky" and that releasing a little steam from an overheated market is often just what's needed.

When it comes to investing, who better to paraphrase than the guru Warren Buffett: In the end, either you have faith in American ingenuity, know-how and capitalism, or you don't. If you do, then these kinds of corrections inevitably result in a buying opportunity. That's why Buffett was the first one to step in and proclaim the financial crisis of 2008 a most excellent time to invest. (And he was right). And if you don't buy into the American Dream, or what's left of it, well then, I hear that Denmark is a very nice place to live.

William D. Cohan, special correspondent, Vanity Fair, was a former mergers and acquisitions investment banker with 17 years at top firms such as Lazard Frères & Co., Merrill Lynch and J.P. Morgan Chase. He is a New York Times bestselling author of three non-fiction books about Wall Street. Cohan is a CNBC contributor.