Buy When There's Blood In The Streets
Buying when there is blood in the streets means you should buy when the markets are bleeding the investors. The term implies that the time for getting good deals is when investors are rushing to sell and there is a low demand for stocks.
In simple economic terms, when everyone is selling, prices fall due to excess supply and demand is low. This makes it a great time to buy. This advice is difficult to follow as very few investors follow this strategy of buying when the market is crashing. This form of investing is known as contrarian investing.
The statement is usually attributed to Baron Nathan Rothschild, of the famous Rothschild banking family, who was born in Frankfurt in 1777 and moved to England when he was 21 in 1798.
He was also known for another move that made him a fortune. He sent a trusted agent called Rothworth to the battle of Waterloo in what is now Belgium. Rothworth saw that Napoleon would be defeated by Wellington and he reached Nathan Rothschild to tell him this a full 24 hours before Wellington delivered the news officially to London.
With this time advantage Rothschild went to the stock market, legend has it he appeared sad and started selling his stock. With herd mentality, everyone was watching him and assumed that he knew Wellington had lost and Napoleon had been victorious, so they started selling their stock too.
Rothschild then waited a little and then started buying back these stocks at a much lower price. Then when the news of Napoleon's defeat reached London stock prices started climbing again which made him huge profits. So here Nathan Rothschild effectively engineered the situation to buy when there is blood in the streets himself.
The documentarian Bill Still describes this incident here in his excellent documentary "The Money Masters" which is available on YouTube.
The famous value investor Warren Buffet has a similar sentiment to Rothschild, he said “be greedy when others are fearful”
Why it’s Scary to Invest In Falling Markets
Most investors follow a herd mentality when investing in stock markets. They invest when everyone is investing (and prices are rising). When markets are in a decline, many investors panic and start to sell off their holdings. This usually pushes the prices further down, and more investors start selling.
Many seasoned investors and investment analysts claim that falling markets are prime markets to pick up bargains, but the average investor is not ready to invest in such markets. This hesitation is due to a fear that prices will fall further, and the trade will prove to be impractical.
The challenge for investors is to time the market and do so successfully. Holding a mindset of waiting for prices to reach rock bottom and then buying is not practical. Having the mindset to buy while prices are low is a better approach.
However, consider the situation when there is blood in the streets as investments crash. With the existing portfolio of stocks in the red, very few investors will have the courage to invest further in stocks.
The key here is to be pragmatic and pick up bargains that you couldn’t earlier due to their high prices. Maybe you didn’t buy your favorite tech stock or Amazon shares because they were too pricey. If you buy them during dips, you can invest in a performing stock at bargain prices.
Supply and Demand Principles
The basic rules of supply and demand economics state that low demand pushes prices down. When markets fall and investors panic it can cause blood in the streets. When panic induced selling starts, there is an excess supply of shares and a lack of demand.
This low demand pushes prices down, and the availability of stocks means that the contrarian investor can go bargain shopping and pick up their choice stocks at low prices.
Such markets can be good for bargain hunting where there are opportunities to pick up good stocks at low prices. Investing in markets when there is blood in the streets allows for great bargains to boost portfolio returns.
We see the same happen when demand is high, and supply is limited (when investors hold on to their stocks in hopes of higher prices). In such a market, the demand goes up and pushes prices upwards.
Bargain Shopping When There is Blood in The Streets
This is why the bad times make for good buys. Falling markets can give rise to good bargains but few investors are alert and “contrary” enough to take them.
The herd mentality is a difficult one to step away from, particularly when you see blood in the streets of your trading screens. Trading against market trends is what allows investors to recuperate from any losses and earn profits by picking up good bargains.
Something that we need to remember as investors is that so far throughout history the market recovers.
In fact, many investors feel that the deeper the fall, the higher the rise afterwards. Looking at the S&P 500 this rebound may take time, as the crash of 2008 shows, or may take just a few weeks like the pandemic initiated crash of March 2020.
The key focus point here is to make sure that you do not end up buying high and selling low just because you panicked seeing all the red in your portfolio. Study the past crashes if you like and see how shares behaved.
If major crashes didn’t impact share prices and returns in the medium term, the regular dips and troughs of trading will not impact them either.
You can take dips as opportunities and treat them as stock sales where you can pick up bargains as you do during Black Friday sales.
Make a Wishlist
To be prepared for any significant market dips, have a list of shares prepared. You can prepare a list of shares that they want to get at specific prices.
For instance, shares currently overpriced are selected and their buying prices listed so that if their prices fall, the investor is prepared to pick them up. Making this watchlist of shares that you want because of their returns, growth potential, or whatever criteria you use is an excellent cheat sheet during market falls.
It takes virtually no time to look up shares, recalculate their valuation, and see if they are worth investing in at their current prices. they can be picked up during the market downturn.
Another strategy investors use is to pick up more of their existing shares during market falls. Even if your shares are in the red, you picked them for a reason, and if there has been no change, you can increase your holdings by picking them up on the cheap. This helps to reduce your investment costs and improve returns when the market eventually picks up after the fall.
You might be also interested in The Advantages and Disadvantages of Buyback of Shares and What is an Investor Day?
