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Fund Spy

Has Market Turmoil Shattered the Investing Rules?

Take note of the reassuring patterns, not the alarming pronouncements.

The past month's stock-market gyrations seem to have everyone on edge. If you've managed to remain calm, congratulations--that's the way to succeed as a long-term investor. If you've been shaken, that's understandable, too. It's tough not to be, given the drumbeat of dramatic news reports about collapsing mortgage firms and 200-point drops in the Dow.

Even more unnerving than the stock market's slide itself is the notion that the recent turmoil has taken an unprecedented and completely unexpected turn. From several fronts we've heard that the markets are behaving in strange, wild ways. The implication: All the assumptions previously underpinning standard investment theory have gone up in smoke.

For example, the manager of a long-short fund, which is designed to handle all sorts of market conditions, explained in The Wall Street Journal his fund's unimpressive showing by saying recent events were "an anomaly." In a Financial Times article, Lehman Brothers explained that its computer models were "behaving in the opposite way we would predict and have seen and tested for over long periods." Later, that same article noted that the computer models running an institutional Goldman Sachs fund had called the confluence of market events so unusual it could happen only once every 100,000 years.