If you want to invest successfully, it’s good practice to learn about different economic theories, finance terms, and investment strategies. However, that knowledge won’t be as useful if you don’t understand the role that human emotions have on market movement and investment.
When you take a closer look at the way the stock market operates, it’s clear that it is not affected only by historical or current events, but by the reactions of the people in those situations. One characteristic of a good investor is being able to predict how society will react to current or upcoming events.
This article will talk about the role that human emotions play in investing and give insight into what it means to invest when there’s “blood in the streets.” Keep reading to learn more.
What It Means to Invest When There’s “Blood in the Streets”
The phrase “the best time to buy is when there’s blood in the streets” is believed to come from Baron Nathan Rothschild of the famous British banking family. The whole idea behind it is that the worse the situation is on the market, the better the chances for profit are. Basically, if you decide to invest when there’s blood in the streets, you’re choosing to buy stocks while everyone else is trying to sell theirs, or vice versa.
It is not confirmed whether Rothschild ever actually said those words. However, regardless, they still reveal an interesting pattern in human psychology—typically, when one group of people starts to panic, almost everyone else follows along. And so, choosing a different path (in this scenario, buying instead of selling) is tough to do on a psychological level, to the point where it’s virtually impossible for most investors.
The investing strategy of buying when the market is going down or buying into unpopular assets is called contrarian investing. Knowing when to apply a contrarian investing strategy and what it actually represents is crucial, so continue reading for a run-down on this subject.
Contrarian Investing Explained
Essentially, contrarian investing means going against the crowd and doing the opposite of what everyone else is currently doing. It’s about making choices that are contrary to the prevailing assets or strategies trending in the market and making independent decisions based solely on your expertise and your assumptions about the future.
When looking at the way the stock market has evolved historically, it can be seen that times when people panic sell and the prices of stocks drop can be great for investors who are willing to take risks and buy during those dips. The contrarian strategy can be extremely profitable when done right; however, there’s still a huge chance of failure, which makes this investment philosophy quite risky.
The term “contrarian” comes from the word contrary, which simply means “opposite.” If you’re a believer in this investment strategy, instead of being alarmed that the stock prices of a significant company are going down, you might get excited, as you will see that as an opportunity for investing. Contrarians operate under the assumption that the market is wrong at both its extreme highs and lows. They tend to believe that the more prices swing, the more confused other investors become, so they’re more likely to make unwise decisions.
What Contrarian Investing Looks Like
If you’re a contrarian investor and the general sentiment is that the market is going up, you might consider multiple factors instead of falling in line with what everyone else is thinking. For example, perhaps the market has been steadily growing for months, and most people are making their investment decisions with this in mind. A contrarian might assume, based on their research, that the market is about to experience a sharp downturn and invest accordingly.
Likewise, if someone tells a contrarian that the market is going to experience a fall, they may take an opposing viewpoint based on their own evaluation of market conditions. To be a successful contrarian investor, one must be able to conduct their own analysis of a certain company or market event and draw a unique conclusion that’s independent of the prevailing mentality.
How Does This Investing Strategy Work?
From the outside, being a contrarian investor sounds easy enough. You just have to go against the grain and do the opposite of what everyone else is doing. When everyone is turning away from investments, you put money on the line, and then, in the end, you’re the winner. However, that’s all easier said than done.
Typically, during the periods when the market is facing its biggest turmoils, contrarian investors make smart moves and end up turning a big profit. They look for times when the whole world is uncertain—which affects the market—and then they make bold moves based on their knowledge, the current events, and what they assume will happen in the future.
This means that contrarian investing requires a lot of financial knowledge, as well as an affinity for research to know which stocks are actually worth taking a risk on and which aren’t. A good contrarian investor doesn’t simply decide to buy a certain stock as soon as it dips but instead tries to determine whether that drop is justified or not. This is the part of the equation that most people tend to get wrong, as many investors lack the necessary knowledge and experience regarding which stock fluctuations you can expect at which times.
As is the case with any form of investing, contrarian investors win whenever they manage to purchase shares from a company at a low price and sell them at a high price once the stock has recovered. If you pick the right stock to buy, it can lead to major profits in the future. A great example comes in the form of Warren Buffet buying shares of the Washington Post during the 73-74 bear market. He got them at a discounted price, as the Washington Post Company had an $80 million market cap during that period. Forty years later, the Washington Post Company was sold to Jeff Bezos for $250 million in cash.
Many People Don’t Invest When There’s Blood on the Streets
With all that said, most people still don’t want to invest when the market is going down. This is understandable, as a few factors ultimately lead to this “safer” behavior that investors display in bear markets.
1. Fear of Losing Money
When we enter a bear market and stock prices are rapidly falling, the risk of further losses is vast. For most people, waiting for 30 to 40 years for a return on investment is either financially impossible or something that they can’t imagine doing. Being a contrarian investor often relies on the notion that you don’t need the money you’re investing for your livelihood, and that’s why you’re more willing to take a risk and face the losses that may come.
However, if the money you’ve put towards the stock market is a part of your retirement plan and you have ten or fewer years left to work, then putting your savings towards an uncertain investment is simply not possible for many. Along with that, most people who invest aren’t Warren Buffet or Baron Rothschild, meaning they’re not expert bankers and financial advisors who have an in-depth understanding of stock market fluctuations.
2. The Human Emotion Element
As mentioned above, the stock market tends to struggle when some kind of worldwide event occurs, and it’s usually not a pleasant one. Bear markets happen in times of recession, wars, terrorist attacks, and so on. In these situations, most people are just trying to find a way to survive and navigate life and thus aren’t really thinking about making future profits.
Additionally, no one can forget the element of empathy. Some people may see investing while there’s “blood in the streets” as profiting on the backs of the suffering of others, which many think of as immoral or unprincipled. Unfortunately, our humanity can make us less successful investors, as we’re thinking more about the hardships that ourselves and others are dealing with as opposed to the possibility of making big wins in the future.
In Conclusion
Making smart stock market purchases “when there’s blood in the streets” requires a lot of knowledge about the financial world and the companies you will potentially be investing in.
However, it also requires a lot of control over basic human emotions such as empathy and fear of losing. This is why, despite the fact that this investment strategy has been practiced often over the years, many investors still shy away from this strategy. In the end, it’s up to you whether you want to take on the risks that come with contrarian investing.
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Please feel free to reach out to me on this or any of your investment needs or questions. I may not always have the answers at my fingertips, but I promise I will get them for you. Harvey Sax
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