Who buys stocks when everyone is selling? Smart investors seize opportunities amidst the panic.

When stock markets enter correction territory, with major indexes falling 10% or more from recent highs, it often sparks a wave of fear-driven selling. Investors desperate to avoid further losses rush for the exits all at once. Yet as Warren Buffet famously advised, the time to "be fearful" is when others are being greedy, and the time to be "greedy" is when others are fearful. Savvy investors take heed, and are ready to swoop in as bargain opportunities arise. Here‘s a look at who‘s still actively buying when rampant pessimism has everyone else hitting the sell button.

Market makers obligated to provide liquidity

During broad market selloffs, bids for stocks can completely evaporate. This is where market makers step in to buy shares using their own capital. Their role is to maintain orderly, liquid markets by standing ready to buy or sell securities. According to the Financial Industry Regulatory Authority (FINRA), over 90% of trading volume passes through market makers. So even in a panic, their buying support provides vital liquidity.

While market makers aim for zero net inventories, the table below shows how three major US equity market makers rapidly increased their long positions as the Covid-19 downturn intensified in March 2020:

Data source: SEC Rule 606 reports

Though providing liquidity isn‘t their primary investment purpose, this facilitates trading and puts a floor under plunging share prices during crises.

Value investors buy amidst pessimism

No value investor embodied this mindset more than Warren Buffett, whose net worth topped $100 billion by patiently buying quality companies at discounted prices. In his own words:

"We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”

When a growth stock falls 50%, value investors see a company selling at half price. Rather than losing faith in the business, they focus on long-term fundamentals over short-term noise. This contrarian approach has led to phenomenal gains for those able to keep emotions in check.

According to research from Brandes Institute, value stocks trading at discounts to book value have dramatically outperformed expensive growth stocks over multiple 10+ year periods. Buying beaten down value consistently pays off for those with patience.

Index funds must keep buying

Index funds aim to replicate major market benchmarks like the S&P 500. To maintain proper weightings as indexes change, index funds have to buy stocks even amidst plunging prices.

For instance, during March 2020‘s 30% selloff, Vanguard‘s S&P 500 ETF (VOO) saw $14 billion in net inflows. This fresh investor cash combined with rebalancing needs meant VOO purchased billions worth of stocks near multi-year lows.

While subsequent rallies lead to index funds selling into strength, their rules-based buying provides critical support during panics.

Short sellers closing out positions

As short sellers watch the prices of heavily shorted stocks fall, they move to lock in profits by repurchasing these shares. In markets where common stocks can shorted, short interest generally rises as greed sets in near tops.

But when sentiment shifts and panic emerges, the ensuing rush to cover shorts becomes buying pressure even amidst an ocean of sellers. This short covering phenomenon partly fueled the "meme stock" rallies of early 2021.

Bargain hunters scour for deals

Savvy retail investors are also keen to take advantage of price dislocations. By maintaining watchlists of quality companies, they can act decisively when their target stocks go on sale. Rather than fixating on bad news, bargain hunters see market overreactions as a chance to buy great businesses below fair value.

Platforms like Seeking Alpha and Reddit‘s r/investing forum have empowered retail investors to pool decentralized research and surface which stocks look undervalued during selloffs. Armed with insights and conviction, bargain hunters provide key buying support.

Dollar cost averaging stays the course

Investors using a dollar cost averaging strategy make fixed dollar amount purchases at regular intervals, regardless of what‘s happening in markets. By mechanically buying more shares at lower prices, they end up reducing their cost basis over time.

This steady buying provides an undercurrent of support beneath the market‘s gyrations. According to DCA platform Stash, their average subscriber continued investing through 2020‘s turbulence. As others wavered, disciplined DCA investors stayed unemotional and stuck to their plan.

Contrarian investors lean into excessive pessimism

While consensus opinion grows extremely bearish at market bottoms, contrarian investors recognize these moments of peak despair as epic buying opportunities. By objectively assessing fundamentals amidst the hysteria, contrarians identify qualilty stocks being unfairly punished.

Banking stocks like Citigroup plunged 60% during 2008‘s financial crisis, even as their core business fundamentals remained intact. Savvy investors scooped up shares at deep discounts during this period of irrational pessimism, ultimately realizing tremendous gains in the years that followed.

Final thoughts

In times of panic, remembering that "this too shall pass" is critical. Maintaining an objective perspective and blocking out the herd mentality can uncover incredible bargains during even the deepest selloffs. While others give in to emotion, smart investors double down and position themselves to profit handsomely when the markets ultimately rebound.