Panic at the stock market!

It’s quite a fascinating day (week)! Markets are falling across the globe, and even the Baltic market has managed to drop 4%. You’d think that this isn’t a huge deal since markets drop all the time, but the expectation of a crisis happening has been hyped so much that people seem almost excited to see if the market will properly crash.

counselling

At first I was quite unmoved by the market dropping since I don’t pay much attention to day-to-day movements but suddenly my Facebook newsfeed was taken over by all sorts of panic, which made me take notice.

Firstly the biggest national business paper of course “helpfully” wrote about how to avoid losing money in a crisis and how to last-minute-rebalance your whole portfolio if you’re afraid and emphasised just how much the markets dropped. (For example Shanghai Composite has dropped 9%!!! Leaving out the fact that 1Y returns are still 45%…)

There was also another subset of personal panic in the form of both gleeful “Kiyosaki was right!” or “Now it begins!” or just “Oh no, the sky is falling!” type of posts.

What to do? What to do?

I think this is a brilliant case study about how panic affects the masses. Seriously, people have been so mentally prepared (or paranoid, depends how you look at it) for a crisis, that the moment something started moving on the market at all then it released an avalanche of panic that caused thousands of people to sell. You’d think that investors would be a bit more rational, but this shows amazingly well just how quickly all rationality is wiped off when your stock portfolio drops into the red.

I’ve also had several people already ask me what to do or what I’m doing about the current situation (as in, whether or not I’m selling). I’ve been honestly super confused at how so many people have been super convinced that the crisis is here and now! How do they know this? I’d be hard pressed to make any predictions about how this will turn out, honestly I think we’re 50-50 at this point that the market will bounce back once the Chinese & US markets have bled out some money.

However, what am I doing? For fun I actually logged onto my stock account to see how everything looks pretty in red to see if I had any emotions on the topic of selling. Not surprisingly, no emotions. I was just left with the feeling that I should think about buying and I should figure out how long to wait before buying, if I think that the Baltic market will drop more or it’ll bounce back relatively quickly.

My recommendation – all those investment plans you made a while back when the market was rising? Look them over and figure out why you’re panicking. The market dropping in such a manner is not at all uncommon, it happens every now and then and even if it is the start of a huge crisis (which I don’t believe, but I’m not an economist), then figure out what you’re going to do calmly and in a rational manner, not after reading all the panic in the media. (Remember – drama sells and the stock market dropping is always very dramatic. Soon we’ll be getting news about people losing their lives’ savings like we did from China a couple of weeks back already!)

12 thoughts on “Panic at the stock market!

  1. Yeah, panic has taken the markets.

    And i’m sitting here and also thinking, should i buy right now?

    I have made myself a plan to buy a set of stocks every quarter. (How much of each, i have my own formulas put into excel) Next time i should buy somewhere in the beginning of September. But now, when everything is “on sale”, i’m really thinking about buying as much as i can right now. (With real money, no leverage through loans or anything)

    At the same time, i think it’s not worth it. If the stock market will soon rise, then for me, this drop was basically non-existent. (everything’s fine) If the stocks market continues to fall, then eventually, on September, i can buy even more for the same amount of money. So, it kind of is a win-win situation for me to just wait and follow the plan i have made to myself. I almost can’t loose really…

    1. Good thing is that you have a plan! Most of investors doesn’t have one. So whatever the market does, just stick with your plan.

      1. +1 for the plan, I also wrote some ideas about it on my blog
        even the slogan under my blog name says: there is no luck, just a plan 😉

  2. Hello,

    I agree, no point taking any action just because the markets has fallen 4 %.
    You mentioned it is rational thing to hold an asset if the price falls (or refuse to sell in lowering prices). However, I would not judge so easily the Panic-Patrics who manage to sell in the current dump. They obviously are betting the market goes lower and if they think the probability of going significiantly lower from the current (quite high levels in many markets), it is actually a rational thing to sell.
    Personally I am a bit surprised on how long the bull market has lasted. People have used to bull market when the markets have gone up pretty much every year since spring 2009. On the other hand, I am not 100 % convinced this is it and now we see a major decline in our markets.
    However, the fundaments are pretty bad in European economies, the unemployment rates are pretty high in many European countries, national debt levels are growing, the Greece will cause some hard time for Europe in the future also as it has not yet been kicked out of Euro zone etc.
    The positive fundaments are pretty much some deflation in short term which might give some boost for demand, lowering oil price and weak euro.
    So as you said, it is pretty much 50-50 now if we go up or down from the current levels.
    Generally it is smart thing to buy high quality companies if their price dips and sell when everybody is pretty excited about stock markets. That’s the simple formula of raking out some money from the markets. :)

    1. True, if you really believe that a BIG drop will happen then it’s reasonable to sell. (Then you should’ve sold BEFORE the market already started dropping, though!) However, for small scale investors the drop has to be really significant just to balance out fees and the loss of nerves 😉

      As I said I don’t think I’m confident that the market will drop further, and I’m surprised that so many people are. However, we were “due” for a drop, so it would be expected that a bit of air would be let out of the prices.

      1. I agree.
        Personally I would suggest to buy more every time the stock drops 30 %. If I were interested in stock markets I would act like this. Any less drop is not worth any action. Selling I would suggest to do when PE and PB and perhaps some other ratios are much higher than the average values of the particular industry.

  3. The one thing I have not understood fully is how come local stock markets are so vulnerable to actions in China etc.. The butterfly effect shouldnt be so prominent to create a 5% daily fall for Tallinn market.. But maybe someone can comment on this further?

    1. This isn’t generally a rational reason, it’s a domino effect. There is very little logical reasoning as to why the Baltic market should drop due to the Chinese market dropping but people are just paranoid that there will be a crash and it’s a race to get out.

  4. There is also one interesting perspective to these panics, it is game theoretic approach. If the market participants believe the other participants are panicing, they will sell even though they will not panic themselves so much.

  5. BTW, have you guys noticed every 7th year around this time of the year there seem to be some sort of a crash in the markets?

    2015 fall Chinese bubble bursts
    2008 fall USA real estates and subprime
    2001 9/11
    1994 Bond collapse
    1987 black Monday
    1980’sh Silver bubble bursts and the case of Hunt brothers
    etc

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