There is a 14% chance of a 42% stock market crash happening in 2021. On average a market crash, thus a drop larger than 20% happens every 6.92 years. This is a given as we have had 13 stock market crashes since 1928. As it is a given, the key is to have a strategy because you can’t predict a crash, you can only take advantage of one if you understand what you are buying and adjust for the probabilities in the market.
Strategy For 2021 Stock Market Crash + Probabilistic Outlook!
Baupost's investment process involves "never-ending" gleaning of facts to help support investment ideas Seth Klarman writes in his end-of-year letter to investors. In the letter, a copy of which ValueWalk has been able to review, the value investor describes the Baupost Group's process to identify ideas and answer the most critical questions about its potential Read More
Stock Market Crash
Good day fellow investors, the question everybody wants to know is will there be a crash in 2021? We discussed yesterday how the economy's bad, will it have repercussions? And I have even seen some videos already starting to talk about with Kira prediction, which is tricky. And here, okay, just keep doing what you want to do. So Graham Stephan is one of the value investors out there. However in this video, I want to discuss what is the key factor that will be driving stocks, and then put things into a probabilistic outlook. It's not whether stocks will crash, the key, and the most biggest value adding I can give you is, okay, if the stock market crashes, what will you do? What's your strategy? When you can have a strategy and we'll put this into a probabilistic outlook that will make it very clear for you about strategies, what will you do and that's the answer to a stock market crash, not whether it will happen, nobody knows that.
Key Crash Factor
So let's start immediately with the reason what pushes stocks higher or lower, we discussed that yesterday, but its flow of funds. If more money goes into the stock market, from the bond market, bond market with zero interest rates, negative real yields, then stocks will keep going higher, there is no other. However, those flows depend on the economy, on monetary policy, how much money will they print? Where will they put that money, other options, the yield on bonds, inflation stimulus, as we said, other expectations, etc, etc. And then there is always the short term expectation. Yes, stocks can go higher, because those are the best assets now, but there is always the long term where valuations impact your long term returns. All that we'll discuss.
Chances for Crash
If we look at valuation, the probabilistic outlook is very, very bad from a long term perspective. The market is at the most expensive levels, it has ever been. From price earnings, from GDP to market capitalization, anything you want, the market is extremely expensive. But this doesn't mean that there will be it must be a crash, the crash depends on flows. And if we look over the last 10 years, you can see that Okay, there was a 34% crash in 2020, 20% crash in 2018, 10% in 2018, a little bit more stability here, and then more volatility around the 2009 and a repercussion crisis. So what we are sure of is volatility. And then if I put things into perspective, since 1926, we have had 13 bear markets. So we have had now a bear market in 2020, over the recovered, so we are at a random walk, we don't know whether a crash will happen next month, or in seven years. Nobody knows that. I wish I knew that then I would just charge 100 bucks to tell you when and I would be the richest man on the world.
Others don't know it too, because if not, we would have somebody else Richard and Jeff Bezos. But we have to put these things into a probabilistic perspective. So 20% market decline is what's considered the crash and the bear market. Also, we are now considering the bull run, including the march crash at one of the best bull markets in history. So at the top peak of the market, which also something to consider. But if we put this into a probabilistic scenario, there is a crash every seven years. You can't avoid it every seven years, will it happen next year, or in 12 years? Nobody knows. But every seven years, there will be a crash. And the average decline is 42%. Welcome to stock market investing, now that you know this, so you can have the right strategy to be prepared to know what stock market investing is. And then when you know, that's it, you're set, you know how to take advantage of the probabilistic outcomes that the market gives. However, there is something else if we look at the stock market, it doesn't always go up. It goes up for a period. But it also uses to stagnate like for 22 years, 17 years, 15 years, 12 years periods where the market doesn't go anywhere.
So if we are now at the peak, and then it takes 15 years for the market to surpass that peak again. Again, the question is, what is your strategy, something I'll show you in a moment, as we said, 14% if we put in a chance percentage chance situation 40% chance for a crash of 42% in 2021, or any given year. That's what history tells us. And what we have to account when it comes to investing, there is no way to avoid it. Then, as we said, on a long term perspective, out of the last 125 years, just 48 were real growth growing beyond the previous peak. So one out of 2.5 years will be below the previous peak. And that's also something you have to keep in mind that there is a strategy that makes you win all the time. Of course, it's stocks don't go up, there is always the dividend.
But the current dividend yield is just 1.62%, which is much lower than the historical average of 4%. So also something to take into account and see how it fits you, that's the most important thing, how the market fits you to reach your financial goals, anything else doesn't matter. And you have to have the right strategy to go from A to your financial goals with the minimum risk involved, that's investing for me. And if you like that, please click that like button for the YouTube algorithm. On top of market volatility, there is individual stock volatility, if we take a look at Apple stock over the last five years, it went constantly up and down. So here it was 56, then it went down to 47. That's a crash, then here 52/53, down to 43, 20% crash and higher, here 80 down to 57. That's an even bigger crash, crash, and cetera, etc. So usually, a stock will go up 40% from the bottom in a given year, and down from the top at least 40%. That's given market volatility, especially on individual stocks. So we have stock market volatility, chance of crash 14% for 2021. And then there is also individual stock volatility, something that you have to implement in your investing strategy for adding money, when to add money, etc.
Now that we know how the market works, we go back to the fundamentals, how will this impact me? How will I behave in a crash? We lie before to sell many see, okay, I need that money, I need to protect my retirement my this, my this, my wife wants to divorce me, those are things that you have to think about. Because those are more important than what the market does. If you have to sell or, on the other hand out, I have the liquidity to buy more, that would be a blessing if stocks crashed, because I can buy value what they already like, at lower prices. That's the key when it comes to strategy. Further, are you a long term wealth accumulator? That is investing over cycles. And over the long term, if we look at this 17 years of stocks going nowhere. If you accumulate over the all 17 years, yes, you buy a little bit here, you buy a bit here too. And this is already up this already 100% up. And that gives you great compounding returns and then when you get this market or what we enjoyed the last 10 years, then you have more and more and you allow for faster and faster compounding reinvesting the dividends, and then over the life cycle of 30-40 years, no matter what the market does, you do good if you have a good strategy. And that's the key message of this channel, too.
When it comes to my strategy I have this is my portfolio started with 100,000 over 2019. We are now at 140,000. So 30% up, that's good. And my strategy is simple. I have cash position of 12%. Okay, plus, I have my strategy that I can borrow up to 25% at a low interest rate of the portfolio, in case there are real bargains. So if there is a crash, I could deploy, let's say 46% of my portfolio, buying cheap things accumulating cheap things. So I'm always praying for a crash, even if this 130 would go to 70. If this 130 would go to 70, I would be a very, very happy man. Because my long term portfolio performance would be even better because of the deployment of this money with real bargains. Current portfolio exposure is a little bit lower than I would expect because of high valuation so a lot of stocks went up. So we are still always looking at sectors at cheap bargain. Low Risk margin of safety opportunities.
As I said, the market is expensive. And when the price earnings ratio, cyclically adjusted earnings ratio is around 40. You can expect low returns. That's it also a long term historical probabilistic outcome. Because if inflation changes if interest rates change, if some other assets are more attractive, if those growth companies can deliver on earnings on dividends over time, the outlook for investing isn't good. So that's also something you have to implement in your strategy. Am I ready to sell when I have enough or it's something that I hold for the very, very long term? And now let me give you the 100% correct market outlook that I make every year and I have never been wrong, of course, as JP Morgan did it. So what's the outlook for 2021? Stocks will fluctuate. So the key is, what will your strategy be? And that's all you need to know when it comes to investing. Thanks for watching. I'll see you in the next video.