It has been a tough couple of years for investors to say the least. Bear markets are gruelling and can feel like a never-ending assault on your portfolio. It hurts to see your investments continue to lose value and even falls below the price at which you bought them. But there is a silver lining to every cloud. Bear markets can be a great time to add to your investments at a lower price. You might be wondering: but who buys stocks when everyone is selling? I’m about to let you know!
Actually, there are quite a few buyers when a market is selling off. Remember, for every trade, there is a seller and a buyer. As much as you might be giving up on a stock, somebody else is more than willing to buy those shares at a discounted price. Even in bear markets, there are plenty of people buying stocks.
That might go against your instinct or conventional wisdom. Heavy selling days certainly exist in bear markets. But did you know that some of the best performances from the S&P 500 come during bear market rallies? Let’s take a closer look at who is actually buying during a bear market.
Who Buys Stocks When Everyone is Selling?
Sometimes it pays to be a contrarian investor. Have you ever heard the phrase: “Millionaires are made in bear markets?”. When stocks are selling off, investors who want to take advantage of lower prices will swoop in.
This falls under Buffett’s famous mantra: buy when others are fearful. There is no time when fear is higher than during a bear market. As everyone sells off their stocks, it provides a wonderful opportunity for those who want to benefit over the long term.
Remember, there has never been a bear market that has not been followed by a bull market. Buying low because you know it will be high again one day can potentially be a winning strategy. But it can also take months or even years to make money from these stocks and there is always the potential the price continues to fall.
If you have heard of the term ‘dip-buyers’ you will know exactly what I am talking about. Dip-buyers are exactly as it sounds: those who buy the dip in a stock’s price. These buyers are one example of investors who buy when everyone is selling.
Do You Buy or Sell in a Bear Market?
It is an interesting question and frankly, it all comes down to timing. Are you really going to sell your stocks, knowing that a bull market might be just around the corner? If you sell these stocks when the price is falling, only to buy again at a lower price, then does it not make sense to just hold those shares until the bull market returns?
Sure, I understand a lot of it is about the opportunity cost of that money. It could be put to work by buying other stocks or assets. Your investing horizon could be a factor in whether you end up being a buyer or seller during the bear market.
Typically, investors think you should sell in a bear market. This allows you to stay in cash or fixed-income assets to ride out the volatility. If you’re really savvy, you can enter put options or even short stocks or indexes.
But you can certainly make a case for buying stocks when everyone is selling. This means that you can sell or buy during a bear market, it depends on how aggressive you want to be and how much capital you have to work with.
Should You Sell Everything in a Bear Market?
For active investors, this is a viable strategy. Moving all of your investments to cash allows you to wait and pick your spots to get back into the market.
Selling everything can be a drastic move though. You might incur brokerage fees for each trade you make which can add up. Also, what if you miss one of those epic bear market rallies? You might be kicking yourself for missing a great opportunity to sell higher.
Finally, how can you ever predict when the bear market is going to end? What if you end up selling at the bottom and then you have to buy back into your stocks at a higher price? These are all legitimate possibilities so you might want to think twice about only selling during a bear market.
A Different Perspective: What Happens if No One Sells a Stock?
Who is Buying Stocks in a Bear Market?
A bear market is typically accompanied by an economic slowdown. This means things like inflation could be having an impact on everyone’s financial situation. It is also why many people cannot buy stocks during a bear market. They are financially unstable and what investments they have are tied up in stocks that are at a loss.
Opportunistic investors include institutional investors who have a ton of capital at their disposal. Another group of dip-buyers is the companies themselves. You will often see companies buying back shares when the price of the stock is lower. Who knows the fair value of the stock more than the company itself?
If you see institutions or companies buying back their stock, it is usually a sign that the price is below what the value should be. It is never a bad idea to follow the big money. At a time when everyone is panic selling their investments, there is some peace in buying stocks at a well-discounted price.
The Bottom Line: Who Buys Stocks When Everyone is Selling?
Although it might not seem like it, there are plenty of investors who are more than willing to buy stocks when everyone is selling. Perhaps it is something you will want to take a look at during our next bear market. Buying while others are fearful has worked out well for Buffett. If you ask me, that is a clear endorsement of buying when everyone is selling!
Thanks for coming by today and giving this a read!