(MONEY Magazine) – On Thursday, Aug. 15, the stock market was shaken by news that the scandal surrounding Salomon Bros., a leading investment bank charged with rigging Treasury securities auctions, was far more serious than it had first appeared. The next day, the Dow industrials fell 30 points. The following Monday came the shocker that Soviet President Gorbachev had been ousted by hard-drinking hard-liners. The Dow plunged another 100 points in the first hour of trading. Yet before Labor Day rolled around, the Dow hit an all-time high of 3055. If you had sold because of the coup, which quickly collapsed, you would have passed up average gains of 6% in less than two weeks. Wall Street pros get a kick out of saying that small investors always panic and sell on bad news. By promoting that cliche, these self-serving experts are sending a simple message: they're smart, you're dumb; so you need their advice. And unfortunately, much of the financial media parrot that idea. The facts, however, show the experts are wrong. The pros are the ones who dump stocks in a sweat; the little guys are the ones who buy. On the morning of the Soviet coup, for instance, a poll of 221 stock investors taken by Fidelity Investments found that 66% considered the upheaval to be an opportunity to buy, while only 9% thought it was time to sell. Buying on bad news is often a smart strategy -- but not always. In the week after Iraq invaded Kuwait in August 1990, the Dow dropped 148 points. Instead of rebounding, though, the Dow sank another 352 points over the next two months. So when a headline makes the market plunge, you must first figure out whether a quick recovery is likely. If it is, you can then confidently buy stocks that have been knocked down. Here's a step-by-step guide to savvy bargain hunting: Keep a cash reserve. Even if you keep your money in stocks, you should always have at least 10% in short-term investments such as money funds so that you have cash to invest. Maintain a ''buy'' list. Rather than trying to spot bargains in the middle of a crisis, prepare ahead of time by putting together a list of financially strong blue chips you would like to own. Set target prices. The stocks on that list should be reasonably priced to begin with. Then write down the target prices that would make them a steal. When a crisis begins, assess the economic backdrop. ''Stocks didn't bounce back after the invasion of Kuwait because the economy was already slipping into a recession,'' explains David Bostian, chief economist at Josephthal & Co. ''But in the case of the Soviet coup, the economy was starting a recovery.'' Bet on a rally only if the backdrop is favorable. Be sure the crisis doesn't have major financial effects. ''As a general rule, news events have only temporary consequences for stock prices,'' says Eric Miller, chief investment officer at Donaldson Lufkin & Jenrette. ''The exception is something like the Arab oil embargo in the fall of 1973, which altered the economic fundamentals.'' By pushing oil prices from $10 a barrel to $19, the embargo rocked the gas-guzzling U.S. economy and triggered the 17- month recession of 1973-75. If you decide today's crisis will be tomorrow's dim memory, buy any stocks on your list that have dropped below your target prices. Also, resist any new spur-of-the-moment strategies inspired by the latest headlines. ''Whatever your impulse tells you to do, don't do it,'' says Michael Metz, chief investment strategist at Oppenheimer. ''Just act as if there were no crisis at all.'' In short, let the others panic, while you profit.

BOX:

THE ECONOMY The Federal Reserve will push down interest rates, if necessary, to sustain the recovery and keep the economy growing at a 2% to 3% rate over the next 12 months.

STOCKS With the outlook for corporate profits mediocre at best, stocks appear overpriced by 15% to 20%. The safest buys are blue chips with yields of 4% or more.

BONDS If inflation stays down and the Fed lowers interest rates, bonds could give you capital gains of 5% to 10% in addition to their yields of 8% or so. But big profits on long-term issues are unlikely.