Panic vs. Rational Selling

The market has seen a lot of panic over the last few trading days. Wholesale dumping of everything that isn’t gold or treasury bonds, followed by frenzied buying of everything today. However, there is a big difference between an impulse to act, driven by fear, and rational decision making driven by a predetermined plan. Although they may occasionally happen at the same time, it is the reasoning behind the action that defines them.

Selling that occurs during a market decline is usually defined by the financial press as panic. This appears to be due to a belief that a wise investor only sells in a rising market, in an attempt to take advantage of the greedy buffoons that are buying on the way up. There is another, less popular, school of thought that says attempting to pick market tops is a foolish endeavor. Instead, we should leave the upside unconstrained, but protect the downside with predefined exits, knowing full well that this means never selling at the top. This is a trend following approach. This is an approach that places a higher priority on making money than being right.