“Markets crash all the time. You should, at minimum, expect stocks to fall at least 10% once a year, 20% once every few years, 30% or more once or twice a decade, and 50% or more once or twice during your lifetime. Those who don’t understand this will eventually learn it the hard way.”

-Morgan Housel



Category: Markets, Psychology

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

12 Responses to “Crash!”

  1. dctodd27 says:

    Someone in their early 40′s has already seen the market crash 50% or more three times already in their lifetime.

  2. Frilton Miedman says:

    Given the severity and frequency of substantial corrections over the last decade, I don’t know.

    The only example over the last 100 years that would spell another big correction after two previous would be 1973.

    I suspect the Fed (dare I say this) is more informed than they were in 1973, specifically where it’s not Greenspan (an Ayn Rand subscriber) behind the wheel now.

  3. WFTA says:

    Stocks have fallen 50% twice in my lifetime already. Does that mean I can relax?

    • constantnormal says:

      … having eliminated the last of the regulatory barriers from the 1930s (the 1999 Glass-Steagall repeal, allowing consumer banks and investment banks to once again share risks), and opened the floodgates of unlimited leverage (the lifting of the SEC’s limits on investment bank leverage in 2004, by chairman Wm Donaldson), I believe we can expect to see financial panics return to the halcyon days before the 1930s, when we had crashes almost like clockwork, every 3-4 years. Certainly by the 2016 election cycle, we should be due for another one.

  4. louis says:

    Those who don’t understand this will eventually learn it the hard way.”

    Except those firms deemed TBTF. They will fail and be rescued by the citizens.

  5. constantnormal says:

    Crashes do not concern me nearly so much as the amount of damage done to the foundations of the economy, and the implications that has on how long if will take to recover. While nobody alive today lost big in 1929, those who did had to wait for over a decade for things to recover.

    The dot-com recession took its time in passing, but it altered the fortunes of smaller numbers of people, being concentrated mostly in the technology sector — that’s not to say that there were not ripples that impacted the rest of society, when you pull the punch bowl away from a party that throws off a lot of collateral spending, everyone feels it in some manner. But the collapse of an internet grocery startup or dog-walking service is not a big deal the the larger scheme of things, even if they erase billions in dubious value as they vanish.

    The 2008 financial debacle hit much harder, and targeted one of the bedrock areas of our economy, the housing markets, ruining millions of families that will require decades to climb back, if they ever manage to do so. That produces ripples that impact the rest of the economy in a more significant manner. That we did nothing to alter the underlying causes, and rescued the major instigators from the consequences of their own actions does not bode well for future crashes.

  6. constantnormal says:

    I wonder how people can be so concerned about avoiding a percent a year in retirement account/mutual fund fees, and yet not be similarly concerned when a small set of people are skimming similar amounts from the value of pretty much every equity out there.

    I don’t understand those that insist that because the HFT crowd only target the big block trades, they think that the small investors are unaffected. Do they believe there is no linkage between prices on big block trades and prices in the retail markets?

    It may not be a direct connection, but when you crank up/down prices in the mainstream of the stock markets, you also raise or lower the levels in the backwaters of retail brokerage as well.

    HFT is in effect, just another fee that does not benefit the system in general. We should dispense with the skimming of prices, and if that cannot be achieved via appropriate regulatory controls, either ban HFT or force everyone to trade using those tools, and also force the distance of the market makers’ servers from those of the exchanges to be equal within a picosecond’s transmission time. Level the playing field.

  7. Not this time. Not in a while, because the cushion of all that cash in markets will blunt the decline.
    Need more exuberance among large caps (acquisitions for example) to hurt markets.

  8. I took a deep dive into a lot of data to address this objectively. Sorry to push a link, but I couldn’t properly cram this into a comment: http://thebuttonwoodtree.wordpress.com/2014/04/02/fear-the-crash-a-definitive-guide-to-corrections-bull-bear-markets/

    • …I think people should take a look at the quantitative data and the qualitative takeaways, because the comments here seem to follow conventional wisdom and the pang of a recency effect. The data say something else…

  9. rd says:

    I don’t think it is quite as random as Housel seems to be saying. My basic model for the markets is that there is a great bull market that usually lasts about 15-20 years. There is then a long grinding sideways market for another 15-20 years. The bull markets have lots of little crashes in them, but rarely over 25% in size whereas there are 40%+ crashes that can recur frequently in the sideways moves.

    I think the 15-20 year long cycles are not accidental. The 15-20 year bull market is built by people who are optimistic for much of the portion of their career while the 15-20 year sideways market is the digestion of that optimism and getting rid of its excesses. It takes that long to really break down the previous optimism psychology and move a new generation into leadership roles. The 1932 bottom was an exception as it was less than 3 years after the 1929 peak but the losses in that crash were so massive that virtually no market leaders survived and the psychology of foolhardy optimism was smashed on the rocks – even so, the sideways grinding went on until just after the end of WW II.

    I don’t think 2008-2009 was long enough after the 2000 euphoric peak, especially since many of the bad actors were rewarded instead of punished. I think we will either grind sideways for a few more years without getting too much above 2007 market levels on an inflation-adjusted basis or we will see a quick spike followed by another breath-taking crash to finish off the current generation of market leaders. I think The Bernank has basically positioned the market to grind sideways for a while longer instead of geting it over with in a massive 1932-type of bottom with lots of pain and suffering spread uniformly across the enitre economy..