The quote “buy when there is blood on the streets” was coined by Baron Rothschild from the 18th century after the panic that arose after the battle of Waterloo against Napoleon. At that time, there was literally blood on the streets in the aftermath of a war. At present, this expression can be interpreted as “buy when it is most pessimistic”. Why is this important? At the moment, the prices are absolutely lowest. The risk is at its lowest and the reward is at its highest, as prices are likely to rise farthest from the lowest point.
What are the signs when there is blood on the streets regarding investments?
People do not want to look at their bank statements or positions. Due to losses in the markets, people become disgusted and go into a sense of denial. This leads to them not wanting to see what is happening in their accounts for fear of being reminded of the pain of their losses.
Markets are hated. People do not want to talk about investing in parties, on social media or in their business contacts. Investing becomes difficult and a source of shame.
Everything is sold – even securities of the best quality to pay off margin calls. If you follow market statistics, during market corrections, the correlation converges to 1. This means that all markets go down at the same rate while the panic is on. Why? All securities are sold at once to pay off margin calls, or pay for money borrowed for investments. Another terminology you will hear is that people reduce their leverage (deleveraging) or pay off their debts to invest. The use of debt is related to the severity of these market corrections.
The price of a necessary product is expected to be zero. This happened with the price of a barrel of oil in April 2020. Oil is a product that people need for everyday consumption, and it takes work and resources to get it off the ground. A price of zero is not realistic and it is obligatory to recover. The price of bitcoin is also predicted to be zero but this is not an everyday commodity (yet), so it is more difficult to use this argument in this case.
Everyone tells you not to buy and news is extremely negative. Media are known to exaggerate issues and cause negative emotions such as fear, anger and hopelessness. In a moment of blood on the street, this is exacerbated by financial talk shows, newsletters and the everyday investor thinking that there is gloom around the corner.
There is usually a moment of fear and hopelessness when panic gives way to a moment of despair. This happened in 2008 when shipping was stopped. It also happened in 2020 when GDP was forecast to decline by 30% and oil traded at a negative $ 37 a barrel on the futures market in April 2020. I could add the “break the buck” moment in 2008 when money market funds threatened not to honor withdrawals of their products, or a rescue announcement from Lehman Brothers in September 2008.
There are some caveats here. A market that crashes by 30% or more is not necessarily a good buying opportunity. The technology market crashed in 2000 and did not recover for many years. When the market recovered, it was different companies that led the technology sector compared to that time. You could have bought the Nasdaq index and participated in the recovery. Japan also crashed in 1991 and did not recover to this day. The key is to identify which markets are companies that are needed and will return due to this need compared to markets that are frothy and will not recover. There is no hard and fast rule to deal with this difference, but some key factors are: if it is a general market like the S&P 500, if it is the sector or product that is always in demand on the main street, or if the values are really low after crashes and will remain low for the foreseeable future, this market is likely to recover.
Buying blood on the street is emotionally difficult. You go against your family, your friends, your broker, the news and the sources of information. If you want comfort, this is not for you. If you want to achieve a huge reward in your investments, this strategy is worth considering.