Beware Of The Bounce

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Weekly Recap

It's been absolute insanity this week so here is a short recap and heads up of things to come.

The biggest news has to be FTX going under. Yep, the crypto brokerage mentioned by Tom Brady, Steph Curry, and every other finance Youtuber is no more. This story is still developing but here is a quick article breaking down the drama. FTX is burning.

If that's not crazy enough for you it's also election week AND inflation data is coming out tomorrow. September's CPI was 8.2% so let's hope for our portfolio's sake it is lower than that.

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Onto today's piece. 🤝

Quote

“Napoleon’s definition of a military genius was, “The man who can do the average thing when all those around him are going crazy.” - Morgan Housel

Beware Of The Bounce

This piece is going to cover a list of market rebounds. 

As you know, the market has been crushing investors this year. It's shown no mercy, especially with some stocks being down over 90% (*cries). When the market falls, there will eventually be a bottom.

When will that be? Nobody knows.

The problem is most people think they can rub their crystal ball and predict the reversal. When their "vision" is wrong, they lose faith, ditch their investments, and call the market a scam.

These people fail to realize...

Being able to buy at the lows is what separates a good investor from a great one.

What you can expect below:

• List of market rebounds

• The danger of missing the bounce

• How to ensure you don't miss out

October 1987 - Black Monday

• Initial fall: -30%

• One year after bottom: +19.2%

Most know this as the time when the market fell 20% in a single day. The crash was due to several factors including a 44% gain in the seven months prior, trade deficit concerns, algorithm trading, and of course...investor fear.

July 1990 - Recession

• Initial fall: -15.8%

• One year after bottom: +29.1%

Sparked by an increase in oil prices due to the invasion of Kuwait, restrictive monetary policy, and inflation concerns (sounds familiar) the market fell almost 16%.

August 2000 - Dot Com Bubble

• Initial fall: -46%

• One year from bottom: +23%

Driven by outrageous valuations on internet and tech stocks, the Dot Com Bubble saw the Nasdaq fall 76.8%. Yes, the Nasdaq went from 5,048 to 1,139 during the crash. Though many companies came to an end during this time, Pets.com, Webvan, and Boo.com, one year from the bottom the S&P 500 index was up 23%.

October 2008 - Financial Crisis

• Initial fall: -52%

• One year after bottom: +51%

Many of you reading this were likely invested during the financial crisis of 2007 - 2008. Thanks to growing concerns about the subprime mortgage crisis, the Lehman Brothers declaring bankruptcy, and the failure of mortgage-backed securities we experienced a financial crisis that rivaled the Great Depression.

December 2020 - Covid crash

• Initial fall: -20.3%

• One year after bottom: +53%

There isn't much for me to say about this one. The world shut down and countries went into lockdown. The market plunged in response to "the vid" but thanks to papa Powell, we saw a 53% recovery in the 12 months after the bottom.

Understand that the money printer going "brrrttt" (stimulus) was a major catalyst for this blinding rally. In all honesty, it's a part of the reason that valuations because so inflated which has led us to where we are today.

January 2022 - To Be Determined

• Market fall: -25%

Obviously, we have been experiencing a market crash. At one point, the S&P 500 was down -25% along with the Nasdaq and Dow retreating -35% and -21%. It hasn't been pretty.

What We Can Learn

You are probably wondering, have we seen the worst of it?

While no one knows the answer to that we can look back at these examples and draw a couple of conclusions.

• Average crash: -32.8%

• Average gain 1 year from bottom: +35%

Is this the most accurate and scientific study? No, I drew a few lines on my computer and did the math on my phone.

The lesson here is you don't want to miss the first few months after a bottom. How do you ensure that? Simple.

You stay invested. 

But let's say you committed an investor sin and pulled your money out of the market near the bottom. Shortly after, prices increased, and increased some more. You hesitate, thinking "is this a fake bounce," only to finally throw your money back in a few months later.

Unfortunately, you likely missed some of the best days in the market as these have been shown to shortly follow a downturn. Missing these best days is not something you want to do. Check out this chart from Fidelity.

 If you like this graphic, or what to share it with your buddy who is "trading," you can download the PDF here.

Conclusion

Market history shows that crashes and recessions happen. It's part of being an investor.

From the charts and data above though it's easy to see why attempting to time the market is a bad idea. You have better odds of winning on the roulette table in Vegas.

My favorite tips for staying invested are silence your phone notifications, view past examples (this email), and have a separate portfolio for "speculative stocks."

Remember this. Investing in a bear market looks dumb, until it turns into a bull market.

Till next time, Cade

What I Liked This Week

MKBHD Views On The Metaverse - Popular tech Youtuber MKBHD sat down with Andrew Schultz and gave his take on the metaverse and what it might become.

How The Wealthy Invest - Article by Nick Maggiulli on the different ways in which wealthy individuals invest their money.

Best Memes

Crypto "bros" right now.

Guilty as charged.

Tom is just having a rough year all around.

Enjoy this post? Consider joining the crew if you haven't yet. Either way, thanks for reading.

Nothing in this email is intended to serve as financial advice. Do your own research. If you have any questions, comments, suggestions, etc. about the email send me a DM on twitter. See you soon!