A friend of ours commented recently that panic buying of investments is a bad sign. He is old enough to remember when the three Hunt brothers tried to corner the silver market and failed.
Panic Buying of Silver in 1979 to 1980
The boom and bust of silver prices is remembered as Silver Thursday, March 27, 1980. Silver was trading at around $6 an ounce in early 1979 and as the brothers purchased increasingly larger amounts of silver on margin, the price rose to $49.45 by January 18, 1980. By that time the three Hunt brothers controlled a third of all silver on earth that was not in government hands!
Our friend commented on how people were taking money out of their bank accounts to buy silver as the price went up. Specifically, when the plumber came out to fix a leaky pipe at our friend’s home, the plumber confessed that he had “invested” his life savings of $30,000 in silver bullion so that he could retire soon.
The sad fact of the matter for our friend’s plumber is that the COMEX tightened margin requirements with Silver Rule 7 and when the price of silver fell ever so slightly, the Hunts did not have the cash to meet their margin call of $100,000,000. They had to sell at huge losses and the price of silver fell by half in just four days. Silver traded at $15 an ounce by June of 1982 and at $6.46 in January of 1993.
Needless to say the plumber lost a large portion of his life savings.
Panic Buying of Bitcoin
Our friend is now well into retirement and living in Latin America. He met a realtor in the coffee growing and mountainous region of Colombia when looking at property there. This was in December of 2017. While Bitcoin had started the year at $900, it was approaching $20,000 and everyone wanted to know how to join in the profits. The realtor admitted that she had emptied her bank account and bought Bitcoin at $15,000. She was so pleased that her investment had gone up right away and that her Bitcoins (3 of them) were worth $19,000 each! She, like the plumber two generations before, envisioned an early and comfortable retirement.
Our friend used his best Spanish in trying to relate the story of the plumber, the Hunt Brothers, and the boom and bust of silver. The lady kept talking about how anyone with any sense should be buying Bitcoin right now (¡Ahora Mismo!).
Bitcoin peaked on December 17, 2017 at $19,783.06 and by December 22 was selling for $13,800. By February 5, 2018 you could buy a Bitcoin for $6,300 and by Halloween the cryptocurrency had stabilized at $6,300.
Our friend has not had any further contact with the realtor but suspects that any plans for an early retirement have been put aside indefinitely.
Panic Buying of Investments Is a Bad Sign
The twin demons of investing are fear and greed. Warren Buffett has often been quoted to the effect that the time to buy is when everyone is afraid and selling their investments and the time to sell is when everyone is buying in a panic. The point is that stocks, real estate, commodities, Bitcoin, and the rest all overshoot their fundamental or intrinsic value when investors imitate lemmings and march in large herds to their doom. This works both in bull and bear markets. And, because the memories of some investors are as short as those of the lemmings, it happens again and again and again.
Panic Buying of Investments Today
CNBC writes that panic buying is likely to drive up stock prices in the near term.
Stocks could get a short-term boost as fear of missing out on gains leads more investors to plow more money into the U.S. equity market, analysts said.
The S&P 500 rose more than 2 percent last week, posting its seventh weekly gain in the last eight. The surge in stocks comes as investors increasingly bet China and the U.S. will strike a trade deal in the near future. It also follows the Federal Reserve signaling it will be patient in tightening monetary policy.
The rationale of smart investors who are buying stocks today is probably that the trade war will averted at the last minute and that the stock market will resume its upward climb as the Fed backs off from its interest rate increases. Unfortunately, as we wrote recently, we could win the trade war and lose on investments.
What is important to note in the CNBC article is that they project a “short-term boost” and not necessarily a resumption of a strong and sustained bull market. In this regard panic buying of investments is a bad sign. Buying shares of companies like Apple, Amazon, or Microsoft today should not be compared to buying silver when the Hunts were cornering the market or when everyone went crazy about Bitcoin. Nevertheless, there are real concerns about the economy, both local and global, and particularly in over-grown and debt-heavy areas like China.
The Trump tax cut was, in the end, a bust for hiring and investment and will have added another trillion dollars to an already-huge US national debt. There may be hope for investment offshore in places like Brazil simply because they were hit so badly when commodity prices collapsed that they have room to recover and because they are still a developing nation with lots of infrastructure needs.
Take-Home Lesson about Panic Buying of Investments
The bottom line of this trip down memory lane is that panic is not a viable investment strategy. Whether you are scared that your investments will lose value or that you are missing out on an opportunity, jumping the gun and selling or buying in response to a moment of panic is a bad idea. Panic buying of investments is a bad sign for the markets because this usually leads to an overshoot in prices which will then correct, sometimes greatly. Then the latecomers to an investment will suffer all of the damage.
As we repeatedly advise our readers, doing routine fundamental analysis of your investments or investment opportunities is where to start. There are certainly times when investment opportunities arise and moving quickly is the only way to make a profit. But, smart investors limit their scope of investing to what they know and pass on getting into investments that they do not understand and where they cannot adequately assess the likelihood of future profits from increasing cash flow.