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Ask the Fool Market Ups and Downs

Q: What should I do if the stock market crashes? - F.R., MiamiA: First off, don't panic. Remember that the market always has its ups and downs, and sometimes the moves are big. This is why you shouldn't have in stocks any money that you'll need within, say, five (or better still 10) years. In the near term, anything can happen, including a crash. Over the long run, though, the market has recovered from all of its crashes and has gone on to set new highs - eventually.

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Q: What should I do if the stock market crashes?

- F.R., Miami

A: First off, don't panic. Remember that the market always has its ups and downs, and sometimes the moves are big. This is why you shouldn't have in stocks any money that you'll need within, say, five (or better still 10) years. In the near term, anything can happen, including a crash. Over the long run, though, the market has recovered from all of its crashes and has gone on to set new highs - eventually.

So brace yourself for inevitable downturns. Know that while your $3,000 investment might grow to be worth $5,000 within a few years, it might also drop to $2,400 in short order. Over the long haul, though, if the company is healthy and growing, the stock price will catch up to the company's worth.

Market crashes have a big upside: They can offer terrific bargains. Warren Buffett has recommended being fearful when others are greedy, and greedy when others are fearful.

Q: How can a firm's earnings per share rise when its earnings are flat?

- I.B., Garden City, N.Y.

A: It happens when the share count shrinks. Imagine that Carrier Pigeon Communications (ticker: SQUAWK) has 10 million shares outstanding and earns $30 million in a quarter. Its earnings per share (EPS) is $3. If it spends some of its cash to buy back a million shares and then earns $30 million again in the next quarter, its EPS has suddenly risen to $3.33 (30 million divided by nine million equals 3.33).

A company's buying back shares can be good - as long as the shares aren't bought at inflated prices. The remaining shares will be worth more.

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