Why do people sell so aggressively in any crisis (including the current Coronavirus one)?

Amar Pandit , CFA , CFP

Buying and selling happens in any market (whether stock, real estate, bonds and even vegetables). That’s what people do. Normally, people sell when they either need money for a need/want or if they believe they have made gains or to sometimes protect themselves from a loss. Not everyone sells at once right, because there are always more buyers than there are sellers (that’s why the markets go up and prices go up because demand is greater than supply – basic economics).

However, the selling that takes place in any crisis (it happens every 7-13 years – don’t look for perfection here but understand the context) is like the one that we witness in stampedes.

People want to be the first to rush out of the door without thinking for a minute about what’s happening. Speed is given priority over thinking. Let’s do something now (The world is ending), we will think later is the common thing (intelligent people make us call it flight to safety).

Here is a typical scenario:

  1. Hedge Funds sell because they are overleveraged (simple language – borrowed to invest) and a sharp decline can magnify their losses and close their shops.
  2. Some institutions following the herd mentality join the race and Sell too.
  3. Generally, some people have friends in giant institutions who tell them get out before everyone else gets out… So some of these people too rush for the door.
  4. Media is anyway screaming Rs.10 Lakh Crore Lost or so much lost and some more people start to panic.
  5. When your friend tells you how smart he has been and out right in time, you once more start to panic.
  6. And the story continues.

These are some of the key reasons why people Sell:

  • Some are selling because they have taken too much Risk.
  • Some people sell out of Fear.
  • Some people sell out of Greed.
  • Some people sell because others are Selling.
  • Some people sell because they feel like doing something. Doing nothing does not give a comfortable feeling so at least do something.
  • Continuation of Point e, many institutions sell to show they have taken action and they don’t want to be seen as fools having not done anything.

Just ask yourself the following and reflect over your responses:

  • What would happen if no one (besides the overleveraged ambitious guys) sold during this crisis?
  • What would happen to your Financial Life if you did not Sell?
  • Why do you want to Sell? (Write Down the Responses)

I would love to know your thoughts on this one…