“The biggest ever single-day price rises on Wall Street came during the bear markets.”
President Trump said, during an election rally in October last year that, “we’re in a bubble right now. And the only thing that looks good is the stock market, but if you raise interest rates even a little bit, that’s going to come crashing down. We are in a big, fat, ugly bubble. And we better be awfully careful.”
At the time the Dow Jones Industry reached 18,000 points and since then has climbed to 22,000, climbing in an almost linear fashion from 7,384 points at the depth of the financial crisis in 2009.
Trump further added that “the day Obama goes off, and he leaves and goes out to the golf course for the rest of his life to play golf when they raise interest rates, you’re going to see some very bad things happen.”
Trump was essentially claiming that a stock market crash was going to occur sometime soon after the U.S. Presidential inauguration.
We know it didn’t happen and the Dow climbed another 4,000 points in that time.
Now, with the news that North Korea has successfully tested an H-Bomb, causing the Dow to drop 200 points, raising the real possibility of military action, could military action be the straw that breaks the camel’s back?
Or could a market sell off of Bitcoin be the catalyst for a stock market crash?
Warren Buffett’s Berkshire Hathaway is currently holding $100 billion in cash, a position he prefers not to have but he hasn’t found suitable investment opportunities to deploy the cash. Perhaps a signal that the market is getting frothy, he is certainly well positioned to strike if a correction occurs.
And this is going to be our main point of focus, how you can prepare right now to take advantage of a stock market crash.
In the late summer and fall of 1857, the U.S. entered its worst economic downturn in twenty years. In this cartoon, a politician grabs the reins of the economic panic of 1857, in the guise of a rearing horse. The frightened creature has already bucked a bank director, who sprawls on the ground amidst damaged mercantile goods and warns the politician of the dangers in trying to halt the panic.
The subsequent discovery of gold in California encouraged land speculation and railroad construction and made the United States a net exporter of gold.
Railroads were the backbone of the economic growth, with the construction of over 20,000 miles of track during the 1850s. They were aided by state land grants and financed by government bonds, stock sales on Wall Street, and foreign, particularly British, investments.
Cleveland, Ohio was particularly hard hit, but there was a young man at the age of eighteen, who at sixteen had just started his first job as a book-keeper and aspiring investor, was a small-time financier in Cleveland.
When the financial crisis gripped Cleveland this young man would later remark in old age, ‘Oh, how blessed young men are who have to struggle for a foundation and beginning in life, I shall never cease to be grateful for the three and half years of apprenticeship and the difficulties to be overcome, all along the way.’
What lessons did this young man learn during those three and half years of apprenticeship and the difficulties he encountered?
We know now that the lessons learnt by the young man would later help him become one of the World’s richest men in history.
His name was John D. Rockefeller.
How do you keep your head when others around you are losing theirs?
If we are going rise to the occasion and seize the moment during a market crash one first needs to condition their mind.
You could have the best investment tools and insights at your disposal, but if you cannot control your own emotions, they are useless.
The Stoics – Marcus Aurelius, Epictetus, and Seneca – have provided us with the mental framework to apply not only during times of extreme pessimism when emotions are running high during market crashes but also for everyday occurrences.
“Don’t let the force of an impression when it first hit you knock you off your feet: just say hold on a moment; let me see who you are and what you represent. Let me put you to the test.”
As Epictetus recommends, challenge first impressions. News will spread fast, news reports will sound alarm bells striking fear into investors.
So say to yourself, just say hold on a moment; let me see who you are and what you represent?
Is it not just people selling out of fear, representing a great opportunity to build your wealth?
Expect the expected.
“Nothing happens to the wise man against his expectation,” he wrote to a friend. “. . . nor do all things turn out for him as he wished but as he reckoned—and above all he reckoned that something could block his plans.”
If you are finding less and less opportunities to invest in the share market due to rising share prices, you’d start expecting that with limited opportunities and share prices on average rising faster than the historical average, the market must be fully valued and you can expect a market correction to occur in the near future. Either in the form of small market correction or at the extreme a share market crash falling 40 percent.
Now, when the market correction – in what every form it presents itself – occurs will you be surprised? Probably not, only to the degree, it occurs at.
A positive by product of setting realistic expectations is that it helps regulate our emotions.
“Regulating your negative emotions is critical to peak performance.”
– Hans Hagemann (Co-author: The Leading Brain: Powerful Science-Based Strategies for Achieving Peak Performance.)
Actionable steps you can put into practice right now.
What is the nature of the stock market?
If you intend to engage in any activity, remind yourself what the nature of the activity is. If you are going to bathe, imagine yourself what happens in baths: the splashing of water, the crowding, the scolding, the stealing. And like that, you will more steadily engage in the activity if you frankly say ‘I want to bathe and want to hold my will in accordance with nature’. And do the same for every activity. So, if any impediment arises in bathing, readily say ‘I did not only want this, but I also wanted to hold my will in accordance with nature; and I will not hold it like that if I am annoyed about what happens’.
Epictetus, The Enchiridion
How did a small number of investors see through the carnage and spot great opportunities to enter the market in 1929 and 1987, while everyone else was tripping over each other to get out?
Stephen Vines explains why in his book, Market Panic: Wild Gyrations, Risks and Opportunities in Stock Markets, this is because