How to stop fearing a stock market crash
Marcus Padley on why chasing headlines about the next stock market crash is the wrong way to make investment decisions.
Do you worry about the stock market all the time? Are you worrying about the AI bubble bursting, the US going bust under the weight of $39 trillion worth of debt? Or maybe you’re worried about Russia invading Europe. There are all sorts of things that people invest on that haven’t happened yet that are low probability. I’m going to give you back your night’s sleep and your weekends with the kids without a worry in the world by telling you to stop worrying. I’m going to show you how. If you’re worrying about the stock market, the problem is not the stock market, it’s you. Here’s why.
Why negative headlines get more clicks
Right? You’re probably aware of this already. Negative headlines appear 17 times more often than optimistic headlines. There are surveys which will tell you on social media that negativity, disaster, sadness in particular, gets a lot more click-throughs than anyone being upbeat, optimistic, nice. Consequently, the media, particularly in the stock market, surrounds you with negativity the whole time. And I want to teach you how to handle that.
There are a couple of things going on here. One is that most of these things which haven’t happened and are very unlikely to happen are used to get eyeballs. But if you start looking beyond tomorrow, beyond the end of your nose, you’re guessing. With the likelihood of these things being really low probability, you’re worrying too much about them. And this whole thing applies to long-term investment. It involves people guessing about what’s going to happen in the future. Coming up with scenarios that are constantly getting people worried about a crash.
There are three words that are the most clicked-on words in the finance space. If you want to get clicks, you’ve got to mention Warren, Buffett, and crash. And crash is there because eyeball tracking on the internet has spotted that eyeballs go to the negative things, not to the positive things. Also has to be said, if you aren’t very experienced and you haven’t worked the stock market out, the likelihood is you think there’s this Machiavellian plot against you that’s going to cause disaster, and you worry about it constantly and you make decisions based on it. But let me tell you, these things are not likely to happen.
Work out the real odds before you worry
When you talk about risk, probability, or the probability of something happening, you just have to think about it in your own head and come up with a number. So what are the odds of the US going bust under the weight of $39 trillion worth of debt? What are the odds of Russia invading Europe? What are the odds of China invading Taiwan? What are the odds of the AI share price rise suddenly catastrophically blowing up on you, and you wake up to find you’ve lost everything in big tech? Let me tell you, in all cases, it’s less than 10%. In other words, it’s nine times more likely that it doesn’t happen, but you’re worrying about the one.
So you need to understand that a lot of things that are unlikely make big headlines, worry you, keep you awake, change your investment decisions, make you very conservative, are in fact costing you enormous amounts of money because you’re ignoring the positive opportunities that are out there. So first of all, stop worrying about things that aren’t likely.
The second thing to know is that things that are unlikely that start to happen that become more likely, you will pick up on it before it happens. Even before a crash, you get signals from the market. We’ve become quite expert at picking the tops and bottoms of the market because we do a couple of things that most other people don’t do.
Read the signals before they hit
Now, at the moment, what are the odds of the AI bubble blowing up? They are low. So, we’re waking up at the moment seeing, for instance, a peace deal. We’re seeing the price of memory chips go up 15 times. And you see the Micron Technology (NASDAQ: MU) share price going up or the Kospi index going up enormously. You’re looking at share price histories and saying, “I’m not buying it because it’s gone up so much.”
But let me just give you the idea of memory prices going up 15 times. That’s like the oil price going from $80 not to $150, which is what we were all worried about. It’s like the oil price going to $1,200.
So, some of the prices are justified. And at the moment, we will run with the AI share price rises. It’s not a bubble unless it bursts. We are going to go with the AI theme, the big tech theme, the semiconductor theme, the networking equipment theme, the AI infrastructure theme until it ends. And we will reassess our decision every day based on fact, not fantasy.
React to change, don’t try to predict it
So we have a principle that we react, we don’t predict. And we’ve got this way of assessing risk. We do it as a team and we say, “What’s the likelihood of China invading Taiwan?” The likelihood is 2%. That’s probably quite a lot still, but it’s 2%. So, it’s unlikely. In other words, it’s 50 times more likely it won’t happen and the markets will ignore it.
So, we’re making assessments on the balance of probabilities of all these major risks out there every day. And whilst they’re all sitting in the 2%, 3%, 1% area, we’re not going to invest on that basis. If this starts to change and it becomes more likely, we’ll be noticing that every day till eventually we start to react to the possibility, a real possibility that something happens in the stock market.
You have to take risk to make money.
And we generally believe that if you have a 66% chance that something will happen, then you’ve got double the odds of it not. And that’s a pretty good bet. If you gave me double the odds on something happening, I would be betting on that. So, we are betting on the stock market going up because the odds of it going up by the end of the year, because it’s currently trending up, because it’s obsessing over AI, which is a positive theme, because it’s not worrying about the war as much. It’s likely. So, we’ll invest on that basis. Now, tomorrow that may change. So, we’ll reassess.
So, here’s your process. If you’re worrying about the market, stop worrying about the ridiculously grand big predictions that people are making. Even economists talking about GDP, they’re guessing, they don’t know. Anyone who says, “Oh, I think BHP Group (ASX: BHP) is a buy for two years.” They’re guessing. They don’t know. Things change. You have to be active and vigilant.
So, your job is to stop worrying about the unlikely. Make decisions on a daily basis. The only way you can do that is to be engaged and vigilant and be prepared to react to change, not make predictions that you can’t make. Do what we do. Wake up every morning, assess what’s happened, and react to it.
Build the daily habit that keeps you calm
Change your holdings if you need to. Most days, you don’t have to change anything, because what you assume the day before is still happening the day after. You only change things when that changes.
This way you can stop worrying about crashes, invasions, war, an AI bubble because they’re unlikely. If they become likely, you’ll pick it up if you watch every day. Watch every day and ignore anybody who’s talking long-term and making a long-term prediction. They are fooling themselves as well as you.
You need to get realistic. That involves opening your screen every day, having a look, making decisions, closing your screen, opening the next day, having a look at what’s happened, changing your decisions, keeping them the same, closing the screens, opening the next day. It’s that simple.
If you happen to get it wrong, if there is some completely unexpected disaster, that’s life, I’m afraid. And if you avoid the stock market permanently because it’s possible, you are missing a huge opportunity.
And of course, if this is all too hard for you, all you need to do is invest with us — take a look at MT20. Or sign up for a free trial of Marcus Today and we’ll help you make decisions every day.