When to buy in a bear market

Share prices have fallen dramatically, and could go further still. So when is a good time to buy?

Article updated: 16 March 2020 9:00am Author: Michael Baxter


If you had bought into the stock market in the UK in late November 1987, you would have made an awful lot of money. If you had bought into the stock market in March 2009 or spring 2003 you would have done even better. When is a good time to buy?

I believe shares are going to fall further. There is a simple piece of maths that illustrates the extent to which we are underestimating the scale of Coronavirus.

For the maths to work: make three assumptions. Firstly, assume that for those people who have sadly died, there was a 15-day time-lag from catching the virus. Assumption two: assume a one per cent fatality rate. Assumption three: assume virus infections double every five days in any closely connected territory, such as the UK. This would mean, that on the day that someone who dies from the virus caught it, 100 other people caught it. Doubling every five days, would mean 15 days later, 800 people would have the virus.

You can play around with my above assumptions, but I would say that as a rough rule of thumb, to work out how many people have the virus in a region, multiply the number of deaths by 800.

In the UK there have been ten deaths, therefore there are around 8,000 people with the virus. This is in the mid-range of the government’s own estimate of between 5,000 and 10,000 people. This would mean that in a football stadium with say 32,000 supporters, there would be four people with the virus.

That would mean, 1,250 people with the virus would use the London Tube in a day — under normal circumstances.

Obviously these numbers will grow — exponentially.

I don’t believe the reality of this is even close to being reflected by stock markets. Don’t get me wrong, if the markets were truly rational, you wouldn’t get periodic crashes at all. If the markets were rational, the only shares to get hammering would relate to companies with shaky balance sheets, because the long term performance of most companies should not be that much impacted by the virus. But as Keynes said: “The markets can remain irrational longer than you can remain solvent.” John Maynard Keynes was a famously clever man, who counted among his friends Bertrand Russell, who was in awe of how brilliant Keynes was. The economist was also a highly successful investor, but went close to failure and was bailed out by his father.

While it is clearly the case that the markets are not rational, I would say there is a kind of logic to their irrationality, almost like an implicit rule book.

The rule book on when to buy or sell

I would say this rule book can be summed up as follows. The time to sell is when all but the most bearish of investors have started investing. The time to buy is when all but the most bullish of investors is selling.

In short, buy when nearly everyone has become a pessimist, sell when nearly everyone has become an optimist.

Joe Kennedy, father of the late President, sold when a shoeshine boy asked for share tips (peak optimism) — and the Kennedy fortune was made.

I don’t think we are anywhere near peak pessimism yet. In the US, where the President is putting in a shockingly bad performance, this is especially the case. As a general rule, I would say Americans are an optimistic people — I like that about them. When most of America has turned pessimistic, it is time to buy — and for as long as the likes of President Trump are talking about buying on the dip, you know we are nowhere near peak pessimism.

Going to get worse

Truth is, I think there is a good chance either me or a close friend or member of my family will get the virus. I am worried sick about one of my kids getting it (even though the fatality rate of people under 30 or indeed under 40 is very low.) I understand there has not been a single fatality of a child under ten — which really is good news. I am especially worried, because I have a grandchild on its way.

Each morning I am asking my wife how she is feeling. I am getting a sense of relief if I feel okay — I am thinking that I am typical, or at least soon will be.

In such circumstances it is difficult to think about buying shares. We wouldn’t be human if our minds were focusing on buying shares when we are worried about loved ones.

That’s why I think markets have got further to fall, a lot further.

Time to buy

The time to buy is when all around there is pessimism and you can somehow see through your own pessimistic mind-frame, and remember these words.

A former Lord Rothschild once said: “The time to buy is when there is blood on the streets.” It is one thing repeating that quote during a more typical market crash, but when there is a virus as nasty as this one, it seems like bad taste. But the most important part of the quote relates to what was said next:

It was during a French Revolution, not the famous won, nor yet the revolution featured in the musical Les Miserables — that was 1832. I believe it was another revolution, although accounts vary, and the specifics of the date are not so important. (Some say it was Waterloo, I am fairly sure that is wrong.)

The Lord said that it was time to buy, and his trusty servant said: “But the streets of Paris are covered in blood.” To which Lord Rothschild said: “The time to buy is when the streets are covered in blood...(and here comes the important bit) even if the blood is your own.”

And that’s your answer.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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