Beginners Education: How to handle a Crash
No doubt a lot of you, scarred by the GFC, or by this the 2020 pandemic-inspired drop in the market, are constantly worried about a significant market correction. It’s no fun investing in “fear” and if that’s you then let me first of all scare you, and then present an adoptable mindset that might rid yourself of the constant worry that the stock market is about to fall over and destroy your financial expectations.
This is a 20 year chart of the S&P 500. Answer me this question, is it trading at the top or the bottom of the long-term trading range?
The bottom of this long-term trading range is around 2900, that's 20% down from the current level (December 2020). If I wanted to get clicks all I need do is put this chart in an article and label it “Stock market could fall 20%”. I would get thousands of clicks and my finger-wagging would seep into the investment cortex of my readers and create fear, for no reason other than to further my commercial purposes. Because there is always, always, always something to worry about in the stock market.
Financial professionals use fear. Whether it is a broker looking for an order, a media person looking for attention, or a financial planner looking to scare someone into becoming a client. Fear gets more traction than optimism, fear gets attention, fear gets clicks. After “Buffett” and “Warren”, “Crash” is one of the most clicked on words in finance. Some commentators make a living out of fear (Nouriel Roubini, Marc Faber).
But there are always two sides to every story in the stock market. As a broker I could list ten reasons to buy any stock and ten reasons to sell it – a useful skill when looking for an order. Point being that you could just as well focus on the other side of the coin.
You need to shed your fear because fear does not work and chickens don’t make money. Plus if you cut out whenever the market loses its head you would miss all the fabulous exponential, irrational, exuberant bits that make the market worthwhile. Those exponential bits are what make up the long-term average. You should expect them, look forward to them, and enjoy them, not avoid them. On top of that it cuts across the core tenet of all technical analysis to sell because something has gone up. You are supposed to sell things that are going down, not up.
If you give in to fear you become one of the Finger-Waggers. I hate Finger-Waggers. Finger-Waggers sell on the way up. Finger-Waggers worry about what might happen and many attention-seeking-click-hungry businesses and commentators feed on that.
So here is a new way of thinking that will rid you of fear. to summarise it this – REACT DON'T PREDICT.
Accept that investment is not about predicting stock market events before they happen. Its not possible except in hindsight. Its called making “Grand predictions” and you don’t have to do it. Leave that to the click whores.
Instead, the way to handle record highs and the fear of a correction is the same way you handle any share price rise :
Don’t predict the highs, wait for them.
React don’t Pre-act.
It’s the best you can do. Whilst the markets are going up, let them. You don’t need to worry about share prices falling until they do.
Your job is to watch not predict. To do that you have to be objective at all times, vigilant, dispassionate, logical not emotional. Be a cold-hearted mercenary. Your job is to exploit the herd, not join it. A good investor watches the herd and doesn’t join the herd.
At the moment (December 2020 coming out of the pandemic) the herd is factoring in a faultless vaccine rollout and a straight line global economic recovery. Yes the herd is taking a lot for granted, yes it may be ahead of itself, yes it may be wrong, yes it could charge over a cliff, but until it does, just keeping watching and waiting. Let it lose its head. Its great. Its making you money. Of course the herd could easily lose its nerve on price alone. It’s a lot easier to pass out at altitude. It is a lot easier to take profits when you’ve got them. The higher it goes the more sensitive the herd becomes to bad news. But for now…its oblivious. So let it run. Don’t double guess its future until it shows signs of doubting itself, and even then, you won't have to spot it, we’ll be watching for you – just read the newsletter.
How often is there a “Crash” style event – Over the last 20 years there has been a tradable correction once every three years and a significant correction once a decade. All spottable as they developed and the bottoms show the same signs as the tops. All major market corrections turn out to be exploitable opportunities in hindsight. Opportunities to sell and buy back. "Buying back" signals are the same as the "precipitous sell-off coming" signals in reverse.
As for the next one, you don’t need to predict the next “precipitous moment”, all you need to do is wait for it and when it comes we’ll be writing all about it for you.
As one of our members (Thanks John W) puts on his email signature, “The trend is your friend until it ends”. When the uptrend is your friend relax.
For the new Members, let me give you one of our core tenets at Marcus Today. The stock market is not about grand predictions, it is not about fortune telling – leave that to the click bait commentators – it is about waking up in the morning and making decisions based on what just happened – it is the best you can do.