What does it mean when investment professionals say, “Buy the panic”?
It’s a phrase that investors might hear frequently given the recent widespread selling in the stock market. Despite snapback rallies on several days, the S&P 500 (.SPX) is down 23% for the year so far.
This particular phrase is a quip that urges investors to buy when others are selling (and in other markets, vice versa). It’s the sort of advice doled out by investing legend Warren Buffett, CEO of Berkshire Hathaway. “Widespread fear is your friend as an investor because it serves up bargain purchases,” he said.
The idea is that when people make panic stock sales, then quality companies can be purchased on the cheap. Indeed, while other people were unloading their stockholdings, Mr. Buffett’s company snapped up cheap securities during the 2008-09 financial crisis.
Buying stocks during a market panic sounds easy to do when you look at history. Still, it’s much harder in practice, says Richard Rosso, director of financial planning at wealth-management firm RIA Advisors LLC in Houston. “The problem is that shares can go even lower in a bear market,” he says.
In other words, the market being down 20%-plus might be just the beginning of an even more significant slide, or it might not. No investor knows for sure.
If investors wait for the market to rally again before investing, then they are giving up on potential profits. But if they act too early when making stock purchases, then they may incur even more losses.
Investors can conquer that problem by making measured purchases depending on how confident they are about where the market is moving. “Is it a big buy or a little buy?” Mr. Rosso says. Or put another way, are you adding 3% to your stockholdings or 1%?
However, the largest hurdle when investing during a panic is that the best time to do so is when you will likely be least willing, Mr. Rosso says. It’s the moment of maximum fear, which will also coincide with the peak in panic. “You sometimes have to think counterintuitively,” he says.
The last moment of heightened fear came at the beginning of 2009 in the dark days of the financial crisis when businesses were shedding hundreds of thousands of jobs each month. At the same time, the S&P 500 hit its lowest level in more than a decade. Fear was palpable.
Mr. Rosso says that at that time, when he rang his clients, the problem was that the individual investors he deals with were all too fearful. “Not one client said we should buy,” he says. The sad part of that anecdote is that March 2009 was the post-financial-crisis low for the S&P 500—the beginning of a historic bull market.
|For more news you can use to help guide your financial life, visit our Insights page.|