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Tanking Market? Stay Calm

|Includes: Barclays PLC (BCS)

There is no doubt that the markets were unprepared for Britain´s decision to exit the European Union (NYSEARCA:EU). The experts, the betting sites and even the fund managers got it horribly wrong as everyone was expecting Britain to remain in Europe (Bremain). Well the chickens came home to roost when the Brexit side won. The financial markets, calm the week before, were rattled as everyone wanted to sell their stocks before the markets dipped further. Those who normally pride themselves as long-term value investor which is all good and nice to say when the markets are calm and volatility is low but is severely tested when the unexpected happens happen and volatility spikes with a sea of red on the financial monitors.

The worst time to sell a stock is when everyone else is selling. That´s when most investors reach for the nearest exit by putting up sell orders and the law of demand and supply sets in. With everyone seeking to sell and few waiting to buy, the stock prices sink even lower increasing the losses as it were. Notably, this is the time to call for calm as an investor but most likely if you read financial news and turn on the screens, they will be screaming at you to sell. At one point during the Brexit aftermath coverage, one reporter on Bloomberg Tv showed us the trading floor with most traders so busy trying to execute sell order that there was barely no time to eat pizza that had been ordered.

The constant barrage of bad new of bad news could easily have exacerbated my irrational tendencies, when what i needed most was to screen out the noise and focus on the long-term health of my portfolio.
-Guy Spier, The Education of a Value Investor-

The Example

Lets observe the price developments of one stock hit by the Brexit vote result. Say a couple of weeks ago as a savvy investor you had identified Barclays PLC (BCS) as your stock pf choice and invested in it as you were confident that financial stocks stood the most to benefit with a vote to remain. However, you wake up on Friday morning to an exit vote and you you were on the wrong side of that bet. You panic and place a sell order immediately. Unbeknown to you several others have also panicked and placed sell orders. Now see what happened when the stock opened trading on Friday morning as indicated by the sharp cliff-like drop on 24th June. The stock had closed the previous day at £186.95.

When the markets opened the volume of trade was so high on this stock with a lot of investors having placed sell orders that the stock plummeted about by almost £50 to £131. Within hours the stock had recovered some of the loses and was at one point trading as high £162. If you had waited a bit longer, you would have had less losses. The close of day price was £153. I am not saying you need to be perfect in timing the market but that you need to be patient when investing.

The lesson

The key lesson here is to be calm when the markets really want to make you act. A sea of red is no reason to panic but rather is the moment to remind yourself of the reason you bought the stock in the first place. Trying to keep your head up is the best thing you can do in a falling market. Some stocks do recover and it is best to wait for the time you feel is best to exit and hopefully, it is not when everyone else is dumping the stock. In the midst of turmoil, keep calm and don´t sell.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.