- Dax – WKN: 846900 – ISIN: DE0008469008 – Price: 14052.10 points (XETRA)
Historically, panic in the stock market is a buy signal. When the global financial system threatened to collapse in 2008, investors like Buffett made the deals of their lives. The advice to buy in a panic goes back a long way. It was allegedly announced by Baron Rothschild as early as the eighteenth century.
As good and simple as this tip sounds, it is not easy to implement in practice. Historic hit rate can be very high. In the past, daily moves like Thursday would have warranted interesting entry points for the DAX over the medium to long term (Chart 1).
Daily moves of 5% and above indicate that panic has started and the bottom is not far away. However, buying on such days requires good nerves. This is especially true because prices rarely revert to an uptrend the next day.
No one knows for sure if the 5% daily loss will be followed by more of these losses. Whether it was 2008, 2001 or 1987, when the panic set in, the market often took a while to cool off. Those who bought on the first day at a loss of more than 5% in 1987 kept losing four weeks, three and six months (Chart 2).
This was true even with prices losing more than 5% for the second, third and fourth time in a single day. This was only the fifth time there was a recovery and positive performance over several weeks and months. Panic is not easily known. A decrease of 5% can be the end or only the beginning.
Getting the bottom right is next to impossible. If you want to buy while in a panic, grab the falling knife. The risk of further price falls is significant. I personally tested this in March 2020. Back when the S&P 500 dropped to 2,700 points, I started buying.
Since then I have always been almost fully invested. Personally, I did not expect an escalation in Ukraine like the one we are seeing now. In hindsight, one is smarter and naturally wishes to have lowered the investment share. Since that didn’t happen I don’t have a high cash share compared to what it was at the time, for example to channel 30% of the portfolio into stocks and then wait a few days to see how the situation develops.
But even those with a high cash ratio do not buy without hesitation. Often the fears of investors are so great that in the end they do not buy at all. If you are afraid, which is also justified (just look at the price list), you determine a very high probability of escalation of the situation.
Who knows what penalties will be imposed now? Who can judge whether other countries do not support Ukraine militarily when we are suddenly witnessing a wildfire in Europe? What happens when neighboring countries are inadvertently drawn into conflict with misguided military strikes? Worst case scenarios are quickly considered. There is not even another escalation in Europe. China can use a distraction to incorporate Taiwan.
You really don’t want to buy stocks with thoughts like that. As a result, investors usually miss out on panic. Anyone who buys regrets it when prices drop again and sells after a very short recovery. The rollback leads to transaction costs and a series of realization losses.
In the end, everyone must assess the situation and make the decision for themselves. If I had a high cash ratio, I would buy an initial tranche of European stock with the clear intention of holding it for years. Since that’s not the case, I decided to sell on Vstoxx. By the way, this requires better nerves than buying stocks now and is not recommended for imitation.