Will The Stock Market Crash Again?
I’m not a big fan of the heat.
The only thing I think this summer heat is good for is being at the pool with the kids. In fact, I try to leave early most days so that I can go there with them at least for a few hours. We create some great summer memories.
Yesterday though was one of those days. I was rushing through to get out and get in time to go to the pool for at least an hour before closing. Just as we get there we see there are no lifeguards out. They had just closed the pool because they heard thunder.
I had looked at the weather before we went and they said it was a 20% chance of a storm at that time.
I thought they were kind of being a little crazy, but, needless to say, we went home.
About ten minutes later the storm started and it was wicked, blowing the trees over, blowing branches down, it even flipped the trampoline over the fence.
The point is, the weather is unpredictable.
I did not see that storm coming at that time, and really, neither did the lifeguards. They just followed protocol, it was right to get out of the pool when they heard thunder.
Another thing that is very unpredictable, just like the weather, is the stock market.
Sitting here at the beginning of this year in 2020, no one would have thought that we were to experience the crazy dip that we did this spring.
No one saw COVID coming with the vengeance that it did. No one saw the market dropping as much as it did.
The market, much like the weather, can be unpredictable.
I always say, “I wish I was a weatherman because I could be wrong 50% of the time and still keep my job!” (No offense to any weathermen out there.)
But the truth is that the market is very much similar. It can be unpredictable. A
But it’s recovered, right?
The question is, where is it going to go from here?
Are we going to keep this trend?” It has kind of gone like a V, Down, and then right back up.
Is that what’s going to continue, or is it going turn into a W, or will we take another downturn?
The fact is, in history, there have been a lot of bear markets that have had multiple drops. It’s not a straight downturn and it looks more like a W or WW, and sometimes the next drop is greater than the last.
I don’t know what’s going to happen, and just like the weather can be unpredictable, so can the market.
Nobody knows exactly what’s going to happen and if they tell you they do, they’re wrong.
I can look at the weather report for 10 days from now and I guarantee you by the time it gets closer it has probably changed. That is the same with the market.
We can kind of see trends and things going on, but nobody knows exactly what is going to happen. If they say they do, run!
Common Portfolio Wisdom says, “WE’RE IN A NEW ERA… OLD MARKET RULES DON’T APPLY”
There’s some truth to that. The speed at which things happen, the speed of information and trading is faster today. There is different technology with the internet, the capability to be able to do auto trades. Yes, there is a lot of new things.
But, the fact is that the market is a result of human reaction and the human reaction is consistent over time.
This drop this spring was compared a lot to the crash in the 20s because of the speed in which it fell. That began the Great Depression.
But do you know what they called the period right before that?
It was the Roaring Twenties. Everything was going great. They did not expect the Great Depression that followed.
We can go through history time and time again and see that.
Stock Market 2020 Forecast
We are never in a new era. Market action is a reflection of human reaction. Human nature is the constant in the equation.
Where we are in a normal market.
In a normal market, there are bulls and there are bears. The market goes up, the market goes down.
I just read an interesting article on why the market must go down, I feel this quote puts it in perspective.
The only reason stocks can go up is because they can also go down. It is this risk that keeps investors in check and that keeps people from paying an infinite amount of money for shares in a business. The reintroduction of risk, in the context of this summer’s sell-off, is the best thing that could have possibly happened. When the possibility of loss goes away, so does the probability of gain.
I’m not saying you need to be okay with the losses. Just like you don’t want to be caught stranded in the storm without any protection.
Warren Buffett says it this way, “You know who’s swimming naked when the tide goes out.”
I’ve been that person at the pool at different times where the thunder didn’t happen, there was really no reason to get out, and then all of a sudden the storm blew over.
I remember once last year, we were swimming, it was perfect… then within 10 minutes, the clouds got dark and before we got out to the cars the wind was just blowing crazy and it was downpouring.
When it comes to the market like we’ve experienced this year, you don’t have a lot of time to react with that.
That’s why you need a plan that is agile, that can adjust, that understands that there’s going to be ups and downs in the market and also managers who know that the key to long-term investing is to avoid the big losses.
So, take Warren Buffett’s advice and head to his rules.
Number one, never lose money.
Rule number two, never forget about rule number one.
Don’t be left stranded in a storm or swimming naked the next time the tide goes out.