Unless you have been on a deserted island with no form of communication, you would know that there is a lot of scare mongering around the possibility of another stock market crash.
Some people call it “terrible October” while others refer to it as “red October”, but any way you look at it, Oct. 2018 has continued to live up to its reputation as one of the most volatile months in the stock market.
Oct. has had a long reputation of being a down month in the market given that previous significant crashes have occurred in this month including the great crash of 1929 (black Tuesday) and black Monday in 1987.
To this day, we continue to be reminded of these crashes, which is why people are so wary when Oct. rolls around. But should we be concerned or is the current bearishness just the market being normal?
So far Oct. has produced a new all-time high on the Dow with the S&P having an all-time high in Sept. Charles Dow, founder of the Dow Jones Index, said that for crashes to occur we need to see rampant speculation in the market with hordes of inexperienced investors jumping into anything that is moving at increasingly higher rates.
We also need to see record levels of borrowing to invest and investors moving into mutual funds.
Whilst consumer debt is up, I believe it is more a sign of a good economy and not rampant speculation from individuals borrowing to get into the stock market or to invest in mutual funds.
If we consider the new inflows into mutual funds, the levels have decreased over the past couple of years.
Looking at the market from a technical perspective, we have more than 200 years of market data that proves the stock market has cycles of 80 to 90 years, with the last major cycle low occurring in March 2008, which is also known as the GFC low.
Prior to this, the major lows occurred in 1932 (the 1929 crash), 1842 and 1762. Out of the 1932 low, where the Dow had fallen 90 percent in price between 1929 and 1932, the Dow rose for 56 months and 382 percent in price before falling 50 percent into a low in March 1938.
During this time, we first experienced a depression and then the 1937 recession, which caused the fall into the low in 1938. The next major fall for the Dow did not occur until the 1970’s, where it fell just over 30 percent.
The move out of the 90 year low that occurred in 2008 has been quite different to the move up from the 1932 low in that we have seen the market rise 115 months and 316 percent, so the rise has been steadier rather than the euphoria experienced in 1932.
We have also not seen a depression, and a short-lived recessionary environment. Once the dust settled after the GFC, the economy started improving to now being strong and indicating that a continued rise in the market is likely sustainable.
Given that we are a mere ten years on from the last 90 year low and the next one is not due until the end of this century, right now I believe we are seeing a normal market adjustment to the current longer-term bull market.
Therefore, my expectation is that any fall on the Dow will be in the vicinity of 15 to 25 percent from its all-time high with support between 22,000 and 21,000 points.
We also need to be cognizant of the fact that for a market to crash to occur we need to see fear and panic, which is fueled by widespread concerns over leveraging by consumers and as previously mentioned, we have not seen this in the stock market, but what about leveraging in the housing market, which was the major cause of the GFC.
While there is some justification for concern in the housing market, it is more around availability given that not enough new housing is being built to handle the growth in the population.
Most of you will remember all the talk in 2007 was about dubious mortgages and lending practices and at the time interest rates were over 3.5 per cent, well above today’s level of 2.25 percent. So, in summary we are not seeing large scale stress in lending for housing.
I have often said that if the majority are suggesting that a crash is imminent, then the market will not crash.
This is because those who are likely to panic would have already sold out and the big end of town would have battened down the hatches and adjusted their portfolios.
The process of protecting portfolios from downside risk has the effect of slowing the market as the re-weighting of portfolios occur, and while over the past weeks we could say there has been signs of this, it has not been widespread over many months, which indicates that the big end of town are not too worried.
Investors are known for following the herd and making reactive decisions, rather than being proactive, and it is well known that the herd get it wrong most of the time when it need not be the case.
Stock Market Turbulence: 4 Ways To Mentally Prepare
From October 1 to November 23 last year, the NASDAQ fell nearly 14% and the S&P 500 fell 10%.
Then over the last week in November, the S&P 500 rebounded 5%.
Then it tumbled again, and wiped out its gain for the whole year.
Feel whipsawed? Sure. We all do. It’s in our brains. The financial markets are only a few centuries old, but our brains are much older — and they were “built” by evolution, not by Apple or IBM. When fear strikes, as it does during a downturn in the market, our evolved instincts tell us to run, same as we would from a fire, a flood or a predator. Applied to the stock market, our primordial urge is to sell, and preserve what we have.
But that urge is hopelessly wrong. It’s a false alarm, and a disastrous “choice” that can dwarf your portfolio forever. Both naïve and ostensibly savvy investors alike may obey that primitive instinct, cash out their portfolios with sighs of relief, and live to rue their decision. The day will come when the market comes roaring back, making new highs, as they cling to the proceeds of unwise sales, wondering when to buy back in — usually too late. There’s a very expensive lesson in this: the people on the other side of those trades were wiser.
In Why Smart People Make Big Money Mistakes, Gary Belsky and Thomas Gilovich relate the cautionary tale of a broker’s experience in the 1987 stock market turbulence. Over a hundred young clients called to sell all or part of their portfolio, hoping to stanch the bleeding. But two old hands over 80 called to buy. Experience beats intelligence.
How can we still our throbbing hearts as markets reverse or even tank, so we don’t sell in haste and regret it during the next market boom? Use the cultural wisdom already downloaded into your consciousness to mentally prepare for stock market reversals:
1. Listen to FDR.
“The Only Thing We Have to Fear is Fear Itself,” Franklin Delano Roosevelt said in his 1933 inaugural address. FDR was speaking to the nation about The Great Depression, then at its depth after the 1929 stock market turbulence. Master politician, master crowd psychologist, and member of the wealthy elite, FDR knew his history. He knew that prosperity would return in time, as part of the natural ebb and flow of markets and economies — if the sociopolitical consequences of the Great Depression could be held in check. In 1933, as in any market reversal, fear was his worst enemy.
2. Heed an ancient adage — and Lincoln.
“This too shall pass” is a renowned Persian, Hebrew and Turkish adage often misattributed to the King Solomon in the Bible. According to Sufi poets, the phrase was a passage etched upon a king’s ring. It was there to make him happy if he were sad and, sadly, to caution him that joy, too, is fleeting. But the most compelling recital of the phrase comes from President Abraham Lincoln: “It is said an Eastern monarch once charged his wise men to invent him a sentence, to be ever in view, and which should be true and appropriate in all times and situations. They presented him the words: ‘And this, too, shall pass away.’ How much it expresses! How chastening in the hour of pride! How consoling in the depths of affliction!”
3. Think like a mathematician.
“Invert, always invert,” said the mathematician Carl Jacobi. Mathematical inversion is a favored thinking tool for both Charlie Munger and Warren Buffett. It flips life’s problems up, down, around and backward until the answer presents itself unbidden. Buffett says, “It’s like singing country western songs backward. That way you can get your house back, your auto back, your wife back, and so forth.”
How can inversion be applied to market downturns and crashes? Invert the naïve impulse to sell into an informed decision to buy. Recognize that if you are wise enough to hold onto stocks for the long term, the price anyone would pay for them in a downturn is irrelevant. If you have wisely stored a cash hoard in anticipation of a downturn, you are not obliged to sell stocks in a down market to harvest cash. And because you are free to buy, the stocks are on sale! Buffett teaches: “Be fearful when others are greedy, and greedy when others are fearful.” But take caution not to buy too soon. Wait until the market bottoms, or in Wall Street parlance, “Don’t try to catch a falling knife.”
4. Shakespeare was right.
“Cowards die many times before their deaths, The valiant … but once,” wrote William Shakespeare. If you fear the market and keep most or all your money in cash or cash equivalents, inflation will, in the fullness of time, destroy your cash hoard. It’s financial death by a thousand inflationary cuts. Though the nominal two percent inflation rate is hardly noticeable day to day or even year to year, compounded over six decades, a dollar is only worth a dime.
If you are wise enough to invest, not play the market or buy and sell, but be brave and hold a steady course through storms and routs, diversified and shielded from taxes in a retirement account, you will find yourself a hero at retirement. And, moreover, to your survivors when you are gone.
Investing In Stocks: 5 Rookie Mistakes To Avoid At ALL COSTS
There’s something about capital markets that captivates everyone: Some think stocks are an easy way to make a quick score. Others, on other hand, liken stock to gambling.
And then there are some who just don’t have a clue about stocks at all.
(Fret not, #WealthGANG, we’re here to serve!)
But why is the stock market so fascinating? What causes people to be completely overawed by it?
Despite the many myths, it is extremely easy to trade in the markets; you can actually get started on your smartphone for less than $10.
But to trade stocks successfully? Now that’s another story—despite what those in-their-20s Instagram crypto money managers and scammers want to tell you.
For all the myths, biases, (mis)beliefs and misconceptions, you can still hedge your bets by following a disciplined blueprint. In this case here, we will share with you what not to do.
Here are X common investor mistakes to avoid at all times.
Mistake #1: Thinking you can make a quick buck from Wall Street
This is probably the single biggest misconception about the stock market. Investor legends like Warren Buffett always maintain you need to invest over a long-term horizon to book big profits.
And even if you have stories like the ‘Teenage Bitcoin Millionaire,’ trust us on this one! They’re the exception, not the rule.
Mistake #2: Investing on impulse
In other words, decision to enter the stock market’s based on an impulse. There’s no proper entry strategy and no exit strategy.
This is not how an investment decision should be made. Every investor should realize that investing in the stock market is a long-term play—it’s definitely NOT a get-rich-quick scheme.
“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”
Mistake #3: Following the hot tip!
Investors are all on the lookout for hot leads and stock market tips. But in reality, there aren’t any. This mistake is exactly how the “Wolf of Wall Street”got people onboard with his schemes.
Even if someone does have a hot tip, you have to watch out for human nature: People may skew positively towards stocks they own—and negatively towards the ones they don’t.
The reality is this: There are qualified analysts who spend all day researching market trends and metrics.
Investment managers and brokers then share these analyses with premium clients. Much more credible info, yes. However even after receiving this analysis, there is no guarantee the investor will see an ROI.
Warren Buffett is a firm believer that investors can grow wealth by just replicating the indices instead of looking for multi-baggers and stocks that are expected to crush the market.
“If stock market experts were so expert, they would be buying stock, not selling advice.”
Norman Ralph Augustine
Mistake #4: “Buy/Sell Strategy”
This is probably the biggest misconception of all. Many investors, impulsively, end up buying a stock just because they see the price surging. (Again, think Bitcoin in December.)
As the price continue to climb, they’ll sell the stock and make a huge profit. The so-called Buy-Hold-Sell Strategy
But that is not how the stock market works. (Buffett’s mantra is buy-hold-and don’t watch too closely.)
If you do buy a stock, hold it for some time and then sell…you don’t have any guarantees the stock will rise.
A better play—aside from Buffett’s, obviously—is the borderline cliched “Buy Low/Sell High” strategy. In this strategy, an investor buys a stock on the downslide instead of when the price is rising.
All the investor has to do is hold the stock until a price correction occurs. If the stock is fundamentally strong, the price will increase. This will be the time to sell it off and earn a profit.
“I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.” — Warren Buffett
Mistake #5: No clear investment objective
Every investor should define, clearly, what his or her investment goals are.
The rule of thumb of investing is the higher the risk, the higher the return. So if the market return is less, then—needless to say—the risk involved is deemed less.
There are two forms of securities, generally: Stocks (equity) and bonds (debt).
Equity stocks tend to have higher risks associated with them. However, there is a tremendous potential to earn capital gains from equity shares—but with the caveat that you should be prepared to lose your investment
Bonds and fixed income instruments are relatively less risky than equity shares. They offer periodic returns in the form of interest but are still prone to market risk.
A short-term investor looking for minimal risk is better off buying treasury bills and government securities.
“You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets.” — Peter Lynch
10 Stock Terms Every Newbie Investor Should Know
Investing in the financial markets can seem quite tricky. There are far too many stories where people tried to play the stock market without much success. When the markets are on a roll, everyone wants a piece of the pie.
Here are 10 terms every investor cannot afford to miss.
The market capitalization of a stock is simply the total number of outstanding shares multiplied by the share price of the company. Companies are generally differentiated on the basis of market cap.
Small cap companies generally have a market cap of between $300M and $2B, while mid-caps are between $2B and $10B. Any company with a market cap over $10B is considered a large-cap. While small-cap and mid-cap stocks have historically outperformed large caps, they are also way riskier.