The phrase “buy when there is blood in the streets” was coined by Baron Rothschild starting in the 18th century after the panic that followed the Battle of Waterloo against Napoleon. At that time, there was literally blood on the streets after a war. Currently, this expression can be interpreted as “buy when there is more pessimism”. Why is this important? This time is when prices are at their absolute lowest point. Risk is at its lowest and reward is at its highest, as prices are likely to rise further from the low.
What are the signs when there is blood on the streets regarding investing?
People don’t want to look at their bank statements or positions. Due to losses in the markets, people get upset and go into a sense of denial. This translates into 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 don’t want to talk about investments at parties, social networks or with their business contacts. Investing becomes gross and a source of shame.
Everything is sold, even the best quality securities to pay margin calls. If you follow the statistics of the markets, during market corrections, the correlation converges to 1. This means that all markets go down at the same rate while the panic is present. Why? All securities are sold at once to pay margin calls or pay off borrowed money to invest. Other terminology you will hear is that people are undoing their leverage (deleveraging) or paying down debt to invest. The use of debt is related to the severity of these market corrections.
The price of a needed 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 daily consumption and it takes work and resources to get it out of the ground. A price of zero is unrealistic and bound to bounce. The price of bitcoin is also predicted to be zero, but this is not an everyday product (yet), so it is more difficult to use this argument in this case.
Everyone tells you not to buy and the news is extremely negative. The media is known to exaggerate issues and provoke negative emotions such as fear, anger, and hopelessness. In a time of blood on the streets, this is compounded by financial talk shows, newsletters, and the everyday investor who thinks doom and gloom is just around the corner.
There is usually a moment of fear and despair when panic gives way to a moment of despair. This happened in 2008 when shipments were suspended. It also happened in 2020 when GDP was forecast to contract by 30% and oil was trading negative $37 a barrel on the futures market in April 2020. Not honoring recalls of their products, or a bailout announcement from Lehman Brothers in September 2008.
There are some notes of caution here. A market that drops 30% or more is not necessarily a great buying opportunity. The technology market crashed in 2000 and did not recover for many years. When the market recovered, there were different companies that were leading the technology sector compared to then. You could have bought the Nasdaq index and participated in the rally. Japan also collapsed in 1991 and has not recovered to this day. The key is to identify which markets are the companies that are needed and will return because of this need versus the markets that are frothy and not going to recover. There is no hard and fast rule to address this difference, but some key factors are: is it a general market like the S&P 500, is it a sector or product that is always in demand on the high street, or are valuations really low after the crash and will remain low for the foreseeable future, then this market is likely to recover.
Buying a moment of blood on the streets is emotionally difficult. You go against your family, your friends, your broker, the news and information sources. If you are looking for comfort, this is not for you. If you want to achieve a high return on your investments, this strategy is worth considering.