In an extreme bear market, investor confidence is positively subterranean. All faith in the market has gone and the human instinct is to bail out. Rational thought is abandoned as panic selling sets in.
With the same frenzy as they bought a stock when it had tripled in value; the same investor, finding themselves in a bear market, is now desperate to offload seemingly at any price. Perhaps for some investors, they are forced to sell but for many, as panic sets in, the only thing they are doing is crystallising a loss. Probably not their finest moment – but they are by no means alone.
Mass bail out
An indiscriminate market sell-off is when the herd instinct kicks in. With so many investors bailing out, it takes nerve to go against the stampede and stand firm. “If everyone is selling; shouldn’t I be doing the same?”
Well no, not necessarily. It may be that a stock market correction or crash has exposed a stock as an absolute basket case. If that is a case, then perhaps you should cut your losses. But in many instances when a whole sector or asset class has taken a caning, there are many good companies that are caught up in the hysteria. As their share price weakens so more investors see the downward momentum and join the selling spree.
Following the herd
The fact that the company’s fundamentals remain strong, that it has a dominant position in its market, that is debt free, cash generative with a healthy forward order book, may count for nought if the herd is piling out of a sector.
The bears are running wild but those who take a more measured approach and look at the fundamentals of a company rather than just the share price, may decide to hold and not sell.
They may decide to add to their weighting in the stock as they see the valuation dip further and present an ideal buying opportunity. For others who have no previous exposure to this stock, it may prove a good entry point.
Blood on the streets
As one fund manager once put – ‘the best time to buy is when there is blood on the streets.’ The market is reeling, the headlines are all gloom and most are looking for the exit signs – that maybe is when you find the diamonds in the dust.
But we are not talking about wild punts here, it is a case of evaluating market sentiment – why it is where it is – and identifying where value might lie.
In an ideal world we would all be able to identify the height of a market, sell at the peak and then start buying back in when prices have hit rock bottom. It is never that simple, but it is possible to have a clearer direction of where markets are headed and base investment decisions on useful analysis rather than speculation and opinion.
The world-wide web may be a wonderful thing, but it can also be responsible for information overload. After reading a selection of investment manager reviews and broker recommendations you will no doubt find yourself weighing up contradictory ‘evidence’.