Fear-Driven Selling: Unveiling the Dynamics of Investor Reactions
In a financial crisis, investors tend to sell first and ask questions later. This selling often triggers a chain reaction, leading to more selling. At this juncture, stock prices can experience significant downward movement, driven by any reason or even no reason at all. Feeling fear during such times is entirely natural. Ordinary investors typically respond by either selling their holdings or refraining from making new purchases. A small group of value-minded risk-takers, however, are willing to step in. Occasionally, the market’s apprehensions are well-founded, causing a stock’s value to plummet to zero. Other times, the market behaves erratically, and astute investors focusing on valuations can reap substantial profits—especially if they hold onto their investments for roughly a decade after acquiring undervalued stocks.
I find it valuable to consider what sets a business apart. Are its services of high quality? Does it enjoy a loyal customer base? Does it deliver value to its customers? If the answers are affirmative, and the business remains robust and creditworthy, a 20% drop in the stock’s price becomes an opportune moment for me to increase my holdings. To be candid, I executed this strategy last week and intend to continue unless I recognize a grave error on my part, resulting in significant losses. This is the essence of capital allocation and risk-taking in the business realm. It’s worth noting that these are the fundamental reasons why investors earn returns—by taking calculated risks and embracing the consequences.
My suggestion, however insignificant it may seem, is to prioritize the quality of the business. Assume the possibility of a complete loss of the invested capital and remain receptive to the idea that the stock market might possess insights beyond your knowledge (a probable scenario). Equally probable is the occurrence of irrational market panics, unrelated to the intrinsic value of the stocks in question.
Keep in mind that such irrational panics can spell doom for even the most prudent and well-established businesses, should they experience a moment of vulnerability. Additionally, recall that governments are averse to financial Armageddon scenarios and likely internalized vital lessons from the Lehman Brothers’ collapse. Some of the same individuals who were present around the table in 2008 are likely engaged in similar discussions at this moment (perhaps as I write), evaluating the potential for a financial system crisis. While it’s essential not to sound excessively alarmist, also remain aware that Russian trolls may exploit the internet to propagate terror and chaos. Be vigilant against fake news and sensationalistic articles. It’s easy to overlook that we are engaged in an ongoing state of conflict with Russia, and they are adept at psychological operations, using the internet as a tool to undermine various facets of American systems—including politics, finance, and banking. Therefore, it’s crucial to maintain a rational, analytical, and skeptical outlook.
