Every investor knows the golden rule: buy low, sell high. Almost every investor also breaks it at the worst possible moment.
It happens in every crash. Prices fall, headlines scream, and people who calmly bought shares a year ago sell them at a large loss, often close to the very bottom. Then the market recovers, and they watch it climb without them. Some come back at higher prices, and the cycle repeats.
I have thought about this question for a long time. Why does a sensible, educated person sell when selling makes the least sense? The usual answer is that investors are irrational, and I don't find that answer satisfying. I think the real answer is that they are human. And I think it is easier to understand when you have stood at that edge yourself.
March 2020
I retired from the Navy on 31 December 2019. By then, the plan I had made for my next chapter was running into the pandemic, and a feeling of panic was already building. Around March 2020, my retirement payouts came through, and that made the situation stranger and, in some ways, more frightening.
Here was a lump sum, the savings of twenty-three years of service, and it was sitting in my account while the world seemed to be coming apart. The markets were falling fast. The Nifty slid to around 7,500 by the last week of March, down by well over a third from where it had begun the year. People across the country were struggling to understand the scale of what was unfolding, because no one had seen anything like it. There was a feeling of impending doom in the air. Every news bulletin made it worse.
And for the first time in my life, I was sitting with real cash.
I want to be careful in how I describe what happened next, because it is easy to make it sound like a stroke of genius. It was not. It felt to me like a do-or-die moment, and I took a leap of faith. I entered the markets, buying into a few heavy engineering companies and some other blue chips. I did not know where the bottom was, and I did not pretend to.
The rest, as they say, is history. By early November 2020, the Nifty had recovered its pandemic losses and crossed 12,000.
But I have thought a great deal since about why I could do that, and why so many other people, in exactly the same moment, did the opposite. Because the investors who sold in March 2020 were not fools. They were people in the same frightened world as I was.
The paradox
Think about the absurdity of the situation, rationally. When a good company's shares fall by a third, the business is, usually, the same business. It has the same factories, the same customers and the same people. If you thought it was worth owning at the old price, then at the lower price it should look more attractive, not less.
Yet this is exactly when most people sell. The same facts that should make us braver make us run. To understand why, we need to look past the spreadsheet and into the human being who is holding the portfolio.
Reason one: The fear of total loss
At the deepest level, a market crash triggers something older than finance. It triggers survival.
When prices fall sharply, the mind does not calmly calculate the likelihood of recovery. It asks a much more primitive question: what if this keeps going until everything is gone? A fall of ten per cent becomes twenty, then thirty, and the imagination extends the line downward to zero. Our minds are very good at imagining total loss, because for most of human history, a catastrophic loss could be fatal.
Psychologists Daniel Kahneman and Amos Tversky showed that losses feel roughly twice as painful as equivalent gains feel pleasant. A crash does not just reduce your wealth. It inflicts continuous pain, and selling is the quickest way to stop the pain. The loss is then locked in, but at least the bleeding has ended. Many sellers at the bottom are not making a financial decision at all. They are making an emotional one: they are choosing relief.
Reason two: The weight of family responsibility
This is the reason I think matters most, and the one that is discussed least.
Investors are not isolated decision-makers. They are parents, spouses, sons and daughters. The money in their account is the school fee, the house loan, the medical reserve, the old parents' care. When the portfolio falls, they do not see a number. They see their daughter's admission, their mother's treatment, their own retirement.
For the person with no dependents, a thirty per cent fall is uncomfortable. For the person who is the sole earner for a family, it is frightening in a different way. Every rupee lost feels like a rupee taken from the people he is responsible for. And the sense of responsibility distorts judgement. It pushes toward protecting what is left, and toward certainty over probability, even when the certain option is the worse one.
I felt this myself. After a long career and a recent retirement, with a family relying on me, I could not pretend the stakes were small. I think that weight is exactly why so many good people sell at the bottom. It is not because they do not care about their long-term returns. It is because they care so much about their families that they cannot bear to watch.
Reason three: Not understanding how markets work
A good deal of panic is simply a lack of context.
Many investors enter the market during a long rising phase, and they have never seen a serious fall. To them, markets go up, with occasional pauses. When the first real crash arrives, it feels like a unique disaster, and not a normal feature of the landscape.
In reality, deep falls are part of how markets work. Prices move on sentiment in the short run, and on business earnings in the long run, and the gap between the two can be wide. Falls of a third or more have happened many times and have usually been followed by recovery, though not always quickly. Anyone who has studied this history knows that a crash is frightening but it is not new.
There is another misunderstanding, and it is subtle. Many people confuse price with value. When the price of a share falls, they feel that its value has fallen with it, as though the market quote were a verdict on the company. In truth, the price in a panic often reflects the mood of the sellers, more than the future of the business.
None of this means you should ignore a fall. Some companies never recover, and some crashes mark real change. But understanding the difference between a market-wide panic and a company-specific collapse is a skill, and without it, every fall looks like the end.
Reason four: The flood of information
In March 2020, I do not think I have ever seen so much alarming information, so quickly.
News channels ran live counts and grim projections. WhatsApp forwards predicted a collapse of the whole system. Every expert had a theory, and most of them contradicted one another. In such an environment, the mind latches on to the loudest and most recent message, a habit that psychologists call recency bias. We assume that what is happening now will continue, in the same direction, indefinitely.
A falling market makes bad news seem more credible, and good news seem irrelevant. Nobody forwards a message saying that the market will probably be fine. The information we consume is skewed towards fear, because fear gets attention.
Reason five: The herd
Humans are social animals, and there is real comfort in doing what everyone else is doing. In a crash, the herd is running, and running with the herd feels safe. Staying put, while those around you sell, feels like standing alone on a railway track.
There is also a social cost to being wrong in a lonely way. If you sell along with everyone else and the market keeps falling, you can say that everybody made the same mistake. If you stay and the market keeps falling, you feel foolish and alone. Most of us would rather be wrong with the crowd than wrong by ourselves. This is why, when everyone is selling, the voice in the head that says "sell" gets louder.
Reason six: The money is needed soon
Not every seller at the bottom is making a mistake of temperament. Some are making a mistake of planning, and some are not making a mistake at all.
If you need the money in six months, because a child's fee is due, because a business needs capital, or because you have lost your job, then a crash is a real problem and not a psychological one. Equity is meant for money you will not need for many years. When short-term money is held in a long-term asset, a fall can force a sale at the worst moment.
Leverage creates the same problem in a harsher form. Someone who has borrowed to invest, or is trading with borrowed margin, may be forced out by a margin call before the market recovers. In those cases it is not fear that drives the sale. It is arithmetic. This is one reason I am so cautious about borrowing to invest.
Reason seven: Watching too closely
There is a well-known idea in behavioural finance, called myopic loss aversion, from the work of Shlomo Benartzi and Richard Thaler. The more often we look at our portfolio, the more often we see a loss, and the more the pain adds up. An investor who checks every day in a falling market experiences dozens of small hurts. One who checks once a quarter sees fewer losses and holds on more easily.
In 2020, many of us checked our phones constantly. Every refresh of the screen delivered another dose of red. It is hard to stay calm when you are reminded of your losses several times a day.
Reason eight: Anchoring, regret and ego
A few smaller traps are worth naming.
Anchoring is the tendency to fix on a particular number, often the price we paid or the peak the market reached, and to judge everything against it. If the market has fallen from a high, we feel the fall as a loss, even though the high was never ours to keep.
Regret is a powerful driver. We imagine how bad we will feel if the market falls another twenty per cent after we decided to stay. Selling avoids that future regret, at the cost of creating another, which is the regret of missing the recovery.
And there is ego. Admitting that a decision may have been a mistake is painful, and some people sell not only to stop the loss but to put the whole experience behind them. The market is, among other things, a daily test of our ability to tolerate being wrong.
Why the bottom is invisible
One more point needs to be made, and it is an honest one. Nobody knows when the bottom has arrived.
In hindsight, the lowest point in March 2020 looks obvious. At the time, it was not. The market had already fallen sharply, and nothing guaranteed that it would not fall further. Investors who sold a week before the low were reacting to real information. The person who sold at the bottom, in that sense, was making a decision that looked as reasonable as any other when it was made.
This matters because it changes the lesson. The lesson is not that people who sold were stupid, or that I was clever. It is that the human mind is working against us at exactly the moment when the best decisions are hardest to make.
I also want to be honest about my own luck. I bought into a falling market and it recovered. If the recovery had taken years instead of months, my experience would have been very different, and I would be writing a different article. Nassim Taleb makes this point in Fooled by Randomness: we judge decisions by their outcomes, and forget the alternative histories in which the same decision turns out badly. My leap of faith worked. That does not make it a rule.
What I think helped
Looking back, I think a few things made it possible for me to act rather than freeze, though I am cautious about turning them into a formula.
I had spent years learning to work calmly under pressure. In submarines, you train for emergencies until the response becomes a habit, and you learn to separate the fear you feel from the decision you need to make. That habit, I think, helped.
The second factor is less about temperament and more about structure. Whether you can act in a crash, or even just sit through one, depends largely on whether the money at stake is truly long-term capital: money you are not borrowing, and will not need in the coming months. If that is not the case, no amount of courage makes it a sound decision. I would not recommend that anyone invest in a crash without that foundation, and I would never suggest committing everything you have to a single moment, however attractive it looks.
The third is humility. I did not know in March 2020 that the market would recover so soon, and neither did anyone else. What I had was a willingness to accept that I might be wrong, and to live with the result. That, more than any prediction, is what an investor needs.
How to prepare for the next crash
There will be another one. The details will differ, but the feeling will be familiar. The time to prepare for it is now, while the markets are calm, in the same way a crew drills for emergencies long before one occurs.
Decide your plan in advance. Write down how much of your money is in equity, why, and what you will do if the market falls by thirty per cent. A decision made in calm conditions is far better than one made in panic.
Keep short-term money out of the market. Maintain an emergency fund and set aside money you will need in the next few years in safer instruments. If you know your near-term needs are covered, you can sit through a fall far more comfortably.
Avoid borrowing to invest. Leverage turns a temporary fall into a permanent loss.
Size your risk to your life, not to the market. The right amount of equity depends on your family responsibilities, your income stability and your temperament. If a thirty per cent fall would make you lose sleep, you may be holding too much.
Automate and look less often. Regular investing through a systematic plan removes the need to decide in the middle of a panic. And checking your portfolio less often reduces the number of times it hurts.
Study history. Read about earlier crashes and how long recoveries took. It will not remove the fear, but it will give you context, and context is a great calmer.
Talk to someone before you sell. A trusted adviser, or even a friend with a cooler head, can act as a check. If you have to sell in a panic, at least wait a day or two.
A closing thought
In the Navy, I learned that the time to learn damage control is before the compartment floods. By the time the alarm rings, you do not have the luxury of thinking. You rely on what you have already practised.
Investing is no different. The investor who sells at the bottom is rarely foolish. He is usually frightened, responsible for others, short of context and swamped with alarming news. The best defence against that is not to be braver in the moment. It is to prepare earlier, so that when the storm arrives, your decisions have already been made.
In March 2020, I sat with cash and fear, and I took a leap. I am glad I did, and I know how much luck was involved. What I would wish for every investor is not that they should take the same leap. It is that they should have the preparation, the plan and the understanding that make their own decision, whichever way it goes, a calm and considered one.
Disclaimer: This article describes my personal experience and views for educational purposes only. It is not investment advice, and it is not a recommendation to buy or sell any security or to invest during market falls. Markets can fall further and for longer than expected, and past recoveries do not guarantee future ones. Please consult a qualified financial planner or adviser before making investment decisions.