How to Protect Your Self From a Stock Market CRASH / Bear Market?
InvestorEducation / Learning to Invest Oct 14, 2021 - 12:40 PM GMTBy: Nadeem_Walayat
Stock Market CRASH / Correction
We will soon be moving into the window for a stock market correction where I penciled the probable expectations for it to take place sometime between Mid Sept to Mid October, though it could start earlier hence why I was not willing to wait around and de risked ahead of the window.
How much could the general indices such as the Dow drop? I have in mind a drop of somewhere between 15% to 20% as being the most provable outcome, though it is early days, so it could be less or it could a more but 15% to 20% is what I have had in mind for the likes of the Dow for some time.
Whether it will be just a correction and resume it's raging bull market or signal start of a bear market proper is uncertain, probability favours continuation but this is not 2011 when we were in a hated stealth bull market that few took seriously instead now every tom dick and harry thinks that stocks can only go up! And so will assume that buying the dip is a one way bet to stock market riches. Which is why one needs to focus on VALUATIONS! Buy when Stocks are CHEAP! For it allows one to survive BEAR MARKETs and not end up with a 20 year Dead Parrots like Cisco and Intel!
Just as bull markets see stocks OVER VALUED, bear markets tend to see stocks UNDER VALUED. Which is why I am reluctant to buy stocks when they are trading above a PE of 20, as there is little margin for error, a stock on a PE of 20 could during a bear market trade down to a PE of 10! Which means if earnings stay static that's a 50% DROP IN VALUE! Which is why I tend to iterate that my portfolio is thus structured that during a bear market or crash I would be fine with my portfolio falling in value by the worse case scenario of 50%, THAT IS THE RISK OF INVESTING IN STOCKS that most of the Johnny come latelys have no experience of or clue of what could hit them! Investing on margin with their 10% or 20% stops is going to get them WIPED OUT!
For me a 50% drop would be a great buying opportunity! I WOULD BE SO HAPPY IF MY PORTFOLIO CRASHED BY 50% IN VALUE AS I WOULD DOUBLE MY PORTFOLIO! Maybe even TRIPLEd it ! For I understand that one can easily recover from a 50% drop, but NOT from a 90% DROP that would become a dead parrot investment!
It is a inevitable that a lot of noob retail investors are going to get badly burned and their PANIC actions will feed the decline which is why the anticipated correction of 10% to 15% could easily turn into a 25%, 30% even 50% bear market as falling prices trigger margin calls, forced selling results in a cascade of falling prices! Which is why I never invest on margin as that is just asking to go broke!
So if you are not fine with a 50% draw down then maybe you need to bloody well start de risking along the highs then pay the price for letting greed get the better of you! After all all those who made say 400% on Cisco going into the March 2000 highs lost ALL of their gains and MORE during the subsequent 90% collapse! Imagine if they had sold say half, they would have still come out the other end with a decent 100% profit instead of a loss that would have crushed their will to invest for the next 20 years, perhaps only to resume investing a few months ago given that we are in a mania that is sucking everyone into it's buy the dip vortex. Forget buying the dip for now instead SELL THE HIGH!
What if I am Wrong and There is No Correction?
We'll I have always considered a correction and crash to be temporary given the exponential nature of the AI mega-trend, which is one of the reasons that whilst i was selling over valued AI stocks, I was also loading up with mostly high risk biotech stocks and eventually jumping in with both feet into the downtrodden Chinese tech giants trading at CHEAP valuations. I say thank you to Winnie the Pooh President of China, you may be a dictator but you did deliver me a buying op so thank you for that.
If I am wrong and stocks don't fall then it is likely I will buy back at least some of my positions that I sold back during late October. That is the price I knew I could pay when I sold them. Though I can't say I will buy back every stock I sold for instance I may still be unable to stomach the high valuations of Amazon and Nvidia, but I will at least buy some Google, Facebook, Apple and Microsoft and aim to buy more Intel and AMD, though not sure about IBM but likely that too as well.
So even if I turn out to be wrong and a correction fails to materialise to any significant extent, then I was still RIGHT to sell 80% of my AI stocks when I did for had I not done so then I would NOT have gone on the hunt for high risk biotech stocks to the extent that I did and likely dismissed buying any chinese stocks as I would have considered them to be adding too much extra a risk too my already fully invested AI stocks portfolio.
So bare in mind, that when ones focus is on certain stocks (AI stocks) then there will be lack of focus on other potential opportunities, So by eliminating focus on what the AI stocks are doing , it can literally open ones eyes on what else is out there at a particular point in time because by the time some thing becomes a BIG INVESTING NEWS story then it is usually already too late to invest i.e. what's the point of investing in Tesla at $700! The time ito invest in Tesla when it was trading at under $200 when it was on few peoples investing radar! Now everyone wants a piece of Tesla!
How to Protect Your Self From a Stock Market CRASH / Bear Market?
Firstly stock market crashes are always TEMPORARY, so the worst thing one can do during a stock market crash is to SELL!
Secondly, the best way to ensure that the stock one is invested in actually does bounce back i.e. many financial stocks for obvious reason did not bounce back following the financial crisis, similarly many stocks after the dot com bust have YET to bounce back some 20 years on and a good 50% went bust..
So what is it that has prevented such stocks from bouncing back after a stock market crash / bear market?
That they were either OVER VALUED or experienced a COLLAPSE in earnings, and likely a mixture of BOTH!
So, rather than getting carried away with imagining how much higher ones core stocks could go, one needs to take a cold hard look at ones core holdings valuations for it is THAT which will determine what happens during a crash and a bear market.
Again a STOCK MARKET CRASH should prove TEMPORARY for Good stocks that are fairly valued. However the higher the valuation then the higher the risk that the market will re-rate the the stock. So even if you buy into the dollar cost averaging mantra, understand that VALUE is KEY! If the stock is expensive then be prepared to pay the price in terms of lack of performance post crash or post bear market.
As during a decade long bull market P/E's can reach levels which were once upon a time seen to be crazy with increasingly many coming out with statements that the valuation metrics of the past no longer apply. If you hear yourself saying that then you are asking to pay the iron price!
As a simple rule for growth stocks I look to pay less than a PE of 20, which means today there is very little that one can buy that one would expect would easily survive a crash and soon recover after a bear market. Amazon Trading at X56 is not going to recover after a CRASH or BEAR market for many, many years!
So take this as another reminder not to get too carried away with paper profits for when the bear bites they will vanish if not crystallised in advance of and you could have to contend with market valuations of sub 20, which for a stock trading on a PE of 40 or more, even with strong earnings growth is going to take many years to recover from. Whereas a growth stock trading on a PE of 20 will soon shrug it off.
The only way one can protect oneself from a crash or bear market the extent of which cannot be known in advance is to ensure one has not got carried away with allowing stocks to run to crazy valuations else be prepared to give up ALL of the value above a PE of 20 just as occurred during March 2020.
This article is an excerpt form my recent in-depth analysis : Stock Market FOMO Going into Crash Season, Chinese Stocks and Bitcoin Trend Update
- FOMO Fumes on Negative Earnings
- Cathy Woods ARK Funds Performance Year to Date - Chinese Stocks Big Mistake
- INTEL The Two Steps Forward One Step Back Corporation
- AMD Ryzen 3D
- New Potential Addition to my AI Stocks Portfolio
- Why is Netflix a FAANG Stock?
- Stock Market CRASH / Correction
- How to Protect Your Self From a Stock Market CRASH / Bear Market?
- Chinese Tech Stocks CCP Paranoia
- VIES - Variable Interest Entities
- CCP Paranoid
- Best AI Tech Stocks ETF?
- Best UK Investment Trust
- AI Stocks Buying Pressure Evaluation
- AI Stocks Portfolio Current State
- AI Stocks Portfolio KEY
- What to Buy Today?
- INVEST AND FORGET HIGH RISK STOCKS!
- High Risk Stocks KEY
- Bitcoin Trend Forecast Current State
- Crypto Bear Market Accumulation Current State
- Crazy Crypto Exchanges - How to Buy Bitcoin for $42k, Sell for $59k when trading at $47k!
The whole of this extensive analysis was first made available to Patrons who support my work. So for immediate first access to ALL of my analysis and trend forecasts then do consider becoming a Patron by supporting my work for just $3 per month that is soon set to increase to $4 per month for new Patrons, so a short window of opportunity exists to lock in at $3 per month now before the price hike. https://www.patreon.com/Nadeem_Walayat.
Including access to my most recent in-depth analysis - Silver Price Trend Forecast October 2021 to May 2022, CHINOBLE! AI Stocks Buying Plan
- UK Inflation Soaring into the Stratosphere, Real rate Probably 20% Per Annum
- The 2% Inflation SCAM, Millions of Workers take the Red Pill
- Silver Previous Forecast Recap
- Gold Price Trend Implications for Silver
- Silver Supply and Demand
- Silver vs US Dollar
- Gold / Silver Ratio
- SILVER Trend Analysis
- Long-term Trend Analysis
- Formulating a Trend Forecast
- Silver Price Trend Forecast October 2021 to May 2022
- Silver Investing Strategy
- SIL ETF - What About Silver Mining Stocks?
- Gold Price Trend Brief
- Why the CCP is Living on Borrowed Time and Needs a War
- Understanding the Chinese Regime and What it is Capable Of
- Guanxi
- Chinese People do NOT Eat Dogs Newspeak
- CHINOBLE! Evergrande Reality Exposes China Fiction!
- AI Stocks Portfolio Investing Strategy
- AI Stocks Portfolio Amendments
- AI Stocks Portfolio Current State
- October Investing Plan
- HIGH RISK STOCKS INVEST AND FORGET PORTFOLIO
- Why China Could Crash Bitcoin / Crypto's!
- My Next Analysis
Also my recent latest extensive analysis on the prospects for the stock market into Mid 2021 see - Stock Market FOMO Hits September Brick Wall - Dow Trend Forecast Sept 2021 to May 2022
Contents:
- Stock Market Forecast 2021 Review
- Stock Market AI mega-trend Big Picture
- US Economy and Stock Market Addicted to Deficit Spending
- US Economy Has Been in an Economic Depression Since 2008
- Inflation and the Crazy Crypto Markets
- Inflation Consequences for the Stock Market
- FED Balance Sheet
- Weakening Stock Market Breadth
- Why Most Stocks May Go Nowhere for the Next 10 Years!
- FANG Stocks
- Margin Debt
- Dow Short-term Trend Analysis
- Dow Annual Percent Change
- Dow Long-term Trend Analysis
- ELLIOTT WAVES Analysis
- Stocks and 10 Year Bond Yields
- SEASONAL ANALYSIS
- Short-term Seasonal Trend
- US Presidential Cycle
- Best Time of Year to Invest in Stocks
- 2021 - 2022 Seasonal Investing Pattern
- Formulating a Stock Market Trend Forecast
- Dow Stock Market Trend Forecast Sept 2021 to May 2022 Conclusion
- Investing fundamentals
- IBM Continuing to Revolutionise Computing
- AI Stocks Portfolio Current State
- My Late October Stocks Buying Plan
- HIGH RISK STOCKS - Invest and Forget!
- Afghanistan The Next Chinese Province, Australia Living on Borrowed Time
- CHINA! CHINA! CHINA!
- Evergrande China's Lehman's Moment
- Aukus Ruckus
So for immediate first access to ALL of my analysis and trend forecasts then do consider becoming a Patron by supporting my work for just $3 per month that is soon set to increase to $4 per month for new Patrons, so a short window of opportunity exists to lock in at $3 per month now before the price hike. https://www.patreon.com/Nadeem_Walayat.
My analysis schedule includes:
- UK House Prices Trend Analysis, including an update for the US and a quick look at Canada and China - 30% done
- How to Get Rich! - 90% done - This is a good 6 month work in progress nearing completion.
- US Dollar and British Pound analysis
- Gold Price Trend Analysis - 10%
And ensure you are subscribed to my ALWAYS FREE newsletter for my next in-depth analysis.
Your AI data preprocessing analyst.
Nadeem Walayat
Copyright © 2005-2021 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.
Nadeem Walayat has over 35 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of five ebook's in the The Inflation Mega-Trend and Stocks Stealth Bull Market series that can be downloaded for Free.
Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication that presents in-depth analysis from over 1000 experienced analysts on a range of views of the probable direction of the financial markets, thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.
Nadeem Walayat Archive |
© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.
