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When buying the dip doesn’t work: An analysis of the dot-com crash

357 points by makaimc 4y ago

tunesmith 4y ago
Another thing to look at is the CAPE ratio. Even now, it's still above 30. We've gone from around a 37 to a 32. Mean/median is in the 16-17 range. DotCom crash in 1999 topped out at around 44. Still a lot of room to fall.
- anonporridge 4y ago
  Also known as the Shiller PE ratio, https://www.multpl.com/shiller-pe https://www.multpl.com/shiller-pe
- onlyrealcuzzo 4y ago
  The historic average for interest rates is considerably higher than it is right now. Considering the amount of public debt outstanding - it's extremely unlikely we're returning to those levels of interest rates long-term (short-term I suppose anything can happen). Interest rates have a huge effect on P/E. I wouldn't expect CAPE to match historic trends if interest rates don't.
  - dannyw 4y ago
    1. Nominal interest rates are pretty normal right now. 3.3% on a 10y, that's not bad in history. 2. The government's debt is fixed. Only new deficit is on higher rates. 3. Completely agree, my thesis is that interest rates are going to continue to go up (IMHO 4%, 4.5%)
    - baq 4y ago
      US government can’t afford 4%. Rates will rise until something breaks, but 4% will be transitory if it gets there at all. My bet is things break sooner than that.
    - runeks 4y ago
      > 2. The government's debt is fixed. Only new deficit is on higher rates. This is not that relevant because the government is completely dependent on borrowing new money to pay of old debt.
a_c 4y ago
Can some of you share what are the ways to hedge against tumbling NASDAQ? The article is assuming we swing only a single bat. To me it seems spreading your investment into fixed dollar amount over a period of time is a sensible strategy.
- baq 4y ago
  In this environment? Nothing, just get out. Gold, short term bonds and dollars (UUP).
vitus 4y ago
> Buying the dip isn’t some secret strategy. Time is the secret strategy. Ah yes, the good ol' "time in market beats timing the market". Of course, that assumes that markets trend upwards in the (very) long term. Which... if past performance is any indicator of future performance [0], the past 100 years provide a fairly compelling narrative. [0] Another mantra: it's not.
- chii 4y ago
  > [0] Another mantra: it's not. it's the best indicator so far.
  - tsimionescu 4y ago
    Given that global warming will cause the global economy to contract one way or another within the next 100 years (either we willingly contract to soften the blow, or keep going and producing more greenhouse gases until a massive crash), I really don't think this is the right time to think in these terms.
    - chii 4y ago
      Why can't technological advancement stave off climate change damage? Why cant renewables replace fossil fuels, and continue human expansion? Why can't space exploration and settlement be where the future growth occurs?
      - milkytron 4y ago
        Maybe those things can happen. But it's a race against time and we don't seem to be making progress on those fronts as much as we may need to.
        chii 4y ago
        10 years ago, no one would predict that the cost of solar would drop by 80%-90%. There's still a lot of untapped potential in other forms of renewables too. The current bottleneck of batteries might be solved, i'm sure, in the near future. There's a lot of pessimism among the media. I, for one, am hopeful.
StanislavPetrov 4y ago
> Buying the dip isn’t some secret strategy. Time is the secret strategy. There is a Dutch guy out there with some rotted tulips who begs to differ.
- chii 4y ago
  when they say buy the dip, they refer to buying the stock market index (like S&P), not individual stocks like a tulip.
  - xeromal 4y ago
    I think their analogy is that your investment in the Prussian/Holy Roman Empire/Carthage stock market can still end up ruined regardless of time.
    - chii 4y ago
      And yes, that's true. Geographic concentration is a real risk. if you purchased a world wide index, you will not suffer from such risk.
      - xeromal 4y ago
        Yeah, that definitely is the best way barring the existence of aliens. :)
      - barefeg 4y ago
        Dinosaurs beg to differ
      - grey-area 4y ago
        World indexes are 50% American stocks, they are not as diversified as you think. They’re also vulnerable to mass panic during a crash.
        pertymcpert 4y ago
300bps 4y ago
The Federal Reserve has taken on $9 trillion onto their balance sheet to flood the economy with money. https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm https://www.federalreserve.gov/monetarypolicy/bst_recenttren... They’ve lowered short-term interest rates to effectively 0 and kept them there for quite a number of years. Federal and State governments have flooded the economy with stimulus. There is so much money that has been injected into the economy that it is no wonder that every asset has gone up so much. It is no wonder we have such high inflation. The trick now will be to stop it before we have a wage-price spiral where employees demand higher wages to compensate for higher prices which leads to even higher prices. Expect the Fed now to be raising interest rates, taking $47.5 billion out of the economy per month starting in June and then $95 billion per month starting in September. https://www.federalreserve.gov/newsevents/pressreleases/monetary20220504b.htm https://www.federalreserve.gov/newsevents/pressreleases/mone... I think what’s coming is going to look at lot more like the dotcom bust than it will 2008. So I think the article’s caution on buying dips this time around is warranted.
- kmonsen 4y ago
  I honestly think that’s not the main reason we have inflation now. Since every country in the world is seeing similar inflation I would think it’s supply side and not something any central bank can fight. I’ve always been Keynesian, but it faces the same problem as everything else, you need to be able to predict the future to do it well.
  - 300bps 4y ago
    Fed balance sheet is about $9 trillion. This article gives details on $5 trillion in government stimulus. https://www.nytimes.com/interactive/2022/03/11/us/how-covid-stimulus-money-was-spent.html https://www.nytimes.com/interactive/2022/03/11/us/how-covid-... To put those numbers in perspective, the market cap of the entire S&P 500 is about $40 trillion. I hear what you’re saying about supply-side inflation but you don’t think flooding the economy with so much unearned money might be driving up demand a bit? A beach town near me, I paid $4,000 for a week to stay there two years ago. This year, an equivalent house is $15,000 per week. So now I’m driving six hours away to get a house for $10,000 per week. When people make $20,000 per month in stock market/cryptocurrency gains, it starts driving up demand for everything dramatically.
daenz 4y ago
>Why has this strategy been so profitable and painless? Well, because stocks have been in a bull market for thirteen years. If "buy the dip" works for a bull market, does "short the peak" work for a bear market?
- daniel-cussen 4y ago
  I would say so. I predicted this bull-to-bear market transition to the day (it started on Sep 27 when the Fed announced rate hikes) and yeah, everything's the opposite.
  - deleted 4y ago
    [deleted]
- kmonsen 4y ago
  The problem is of course we don’t know how long bull or bear market will last. If I was a betting man I would short everything I guess, but I’m not. I’m also sure there are others with way more knowledge on when it’s going to turn around.
  - hammock 4y ago
    > If I was a betting man I would short everything On a long enough timeline, the survival rate for everyone drops to zero
    - kmonsen 4y ago
      But then surely it doesn't matter. To short everything you have to hope it gets worse, but not nuclear war worse. Like just so bad that you can earn a ton of money, but not so bad that the money is useless. Or so bad that the fed decides to intervene as well.
- __john 4y ago
  The technical expression is "buy the dip, short the rip".
yowlingcat 4y ago
Buy the dip is always trumped by "don't try to catch a falling knife." If you can't tell the difference (I am not professionally trained to) then it may not be worth the effort.
- JKCalhoun 4y ago
  I assume catching a falling knife is at least preferable to buying the peak. :-)
  - yowlingcat 4y ago
    An addendum is that if you, like me, are not professionally trained -- it will be impossible to discern buying the peak, a falling knife, or the dip.
throw0101a 4y ago
Nick Maggiulli: > Logically, it seems like Buy the Dip can’t lose. If you know when you are at a bottom, you can always buy at the cheapest price relative to the all-time highs in that period. However, if you actually run this strategy you will see that Buy the Dip underperforms DCA over 70% of the time. > This is true despite the fact that you know exactly when the market will hit a bottom. Even God couldn’t beat dollar-cost averaging. > Why is this true? Because buying the dip only works when you know that a severe decline is coming and you can time it perfectly. Since dips, especially big ones, haven’t happened too often in U.S. market history (i.e. 1930s, 1970s, 2000s), this strategy rarely beats DCA. And the times where it does beat DCA require impeccable timing. Missing the bottom by just 2 months lowers the chance of outperforming DCA from 30% to 3%. * https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-cost-averaging/ https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-co... The thing about trying to miss the worst days (get out before the dip, get in after), is that the 'best' (recovery) days are often not long after, and if you miss just a few of those your returns get hosed: > If you missed just the 25 strongest days in the stock market since 1990, you might as well have been in five year treasury notes. * https://theirrelevantinvestor.com/2019/02/08/miss-the-worst-days-miss-the-best-days/ https://theirrelevantinvestor.com/2019/02/08/miss-the-worst-... > This is actually a pattern, it turns out. The market’s worst days tend to be followed by its best days, according to research from J.P. Morgan Asset Management. > If you sell when the markets hit the skids, you’ll likely miss the upside. […] > According to J.P. Morgan’s analysis, the 10 best days over the past 20 years occurred after big declines amid the 2008 financial crisis or the 2020 pullback during the onset of the Covid-19 pandemic. * https://www.cnbc.com/2022/03/09/you-may-miss-the-markets-best-days-if-you-sell-amid-high-volatility.html https://www.cnbc.com/2022/03/09/you-may-miss-the-markets-bes...
- GlennS 4y ago
  > This is true despite the fact that you know exactly when the market will hit a bottom. Even God couldn’t beat dollar-cost averaging. I'm a bit unconvinced by the studies that say this, because I don't think the "buy the dip" strategy they're talking about is the same one that people are running. The studies describe waiting for a low point in a given year (or even across multiple years!) then lumping in all your money then. Whereas I think what people actually mean when they talk about buying the dip is shifting their dollar cost averaging buy-in by days, weeks, or at most a few months, while they wait for the market to get spooked. I don't do this at the moment. I had a "wait for the US president to say something stupid" strategy which seemed to work for a while, but of course I don't really have enough evidence to back that up.
fny 4y ago
Look at a chart of the S&P 500 from 1920 to 2008 and you'll notice something rather curious: the stock market has gone parabolic ever since the financial crisis. What made this period so unique? Tremendously low interest rates coupled with quantitative easing dissuaded capital from financing the real economy and instead encouraged herding and levering up in the financial economy for returns. At ever dip, it was an open secret the Fed would cut rates and ease again. At least for now, that game is over. We've had moments in the past when the markets had a similar panic (see 2018), but this period is unique due to the inflationary backdrop. Since 2008 we've never seemed to be able to create significant economic growth or inflation greater. The COVID fiscal canon blew growth and inflation skyward. The fed can't just turn on the printers again or cut rates until we hit proper a proper recession. That's when you buy the dip. [0]: https://www.macrotrends.net/2324/sp-500-historical-chart-data https://www.macrotrends.net/2324/sp-500-historical-chart-dat...
- deleted 4y ago
  [deleted]
- tyre 4y ago
  > The COVID fiscal canon blew growth and inflation skyward. This is not true and has wrongly given credit to people who have said, since 2020, that COVID relief would cause inflation. Our current inflation is driven by supply chain issues (unrelated to COVID relief) and rising oil (unrelated to COVID relief.)
  - candiddevmike 4y ago
    From what I've read, our current inflation is due to combo of inflated asset prices causing mortgages and rents to skyrocket along with corporate greed raising prices "because of inflation".
    - darkerside 4y ago
      You should probably widen the pool of what you read. You're not wrong (well, corporate greed tends to be a bit of a bogeyman), but it's certainly reductive.
nathanvanfleet 4y ago
Sad to think that investing in the stock market, which I have only been able to financially over the last 5 years might have been much riskier than I might have previously thought. What I previously thought as "okay I just leave it in the stock market for a bit of time to recoup" is something I am now realizing would likely have to be 10+ years. It's kind of funny because I was getting shaky about having money in the stock market back in December, and I held onto investing some of my money there. But I ultimately relented 4 months later to lose 10% within about two weeks (and after just index funds). Now it's much worse, and I guess I'll just leave it all there. And in 15 years I'll be back to where I was when I originally invested it.
- chii 4y ago
  you have to take risk to earn returns. Sometimes that risk actually eventuates, and you have to either keep going, or take the loss. That's why you must know the time horizon for your investments - if you know you need the money "soon", you cannot actually invest in the stock market.
  - bequanna 4y ago
    You have to take calculated risks to earn returns. FOMO at your own risk. If you are 30 and don’t need the money you put in SPY until 70, don’t sweat it. You’ll be fine. But let’s not pretend blindly taking risk is OK because some return is expected. Time horizon and some relative valuation context is important. Buying into the stock or housing market at extreme historic levels of valuations like those in late 2021 and now GREATLY reduces your expected return over 5/10 years. If you don’t have the (extremely) long view, expect to lose some sleep watching your net worth over the next couple years.
    - deleted 4y ago
      [deleted]
    - srean 4y ago
      > But let’s not pretend blindly taking risk is OK because some return is expected. Exactly. I have seen this idea float around that just because they have taken a risky position they will be able get better rewards. Risk may be necessary for above market rate returns, but it is not sufficient. A proportionate amount of those taking the risk will be cleaned off the amount that was risked. Why do you think its not going to be you ! Of course when you use time effectively or use other hedges one can reduce the exposure.
mwattsun 4y ago
I lived through the dot-com crash and got out safely after hearing something so ludicrous that I had to ask myself "How insane does this industry have to be for someone to think they can build a high growth internet company out of home cement delivery?" My memory may be playing tricks, but it was something like that. After 2008 I became interested with crashes throughout history. There are so many fascinating little details that added up to one giant mess.
- sharkweek 4y ago
  Have you seen the movie Margin Call? There’s a great scene where the CEO of a Goldman-style bank is recapping the last 100+ years of global financial collapses and he mentions, “we just can’t help ourselves.” https://youtu.be/LtFyP0qy9XU https://youtu.be/LtFyP0qy9XU One of the best banking movies I’ve ever seen. Jeremy Irons absolutely nails his role.
  - throwaway_1928 4y ago
    Will Emerson: Jesus, Seth. Listen, if you really wanna do this with your life you have to believe you're necessary and you are. People wanna live like this in their cars and big f-in' houses they can't even pay for, then you're necessary. The only reason that they all get to continue living like kings is cause we got our fingers on the scales in their favor. I take my hand off and then the whole world gets really f-in' fair really f-in' quickly and nobody actually wants that. They say they do but they don't. They want what we have to give them but they also wanna, you know, play innocent and pretend they have no idea where it came from. Well, thats more hypocrisy than I'm willing to swallow, so f em. F normal people. You know, the funny thing is, tomorrow if all of this goes t-s up they're gonna crucify us for being too reckless but if we're wrong, and everything gets back on track? Well then, the same people are gonna laugh till they p-ss their pants cause we're gonna all look like the biggest p-ssies God ever let through the door. Seth Bregman: Do you think we're gonna be wrong? Will Emerson: [long pause] No, they're all f-d. (edited for language)
    - iplist 4y ago
pdevr 4y ago
Index investing will work, if you live for a long time. The problems are, we do not live infinitely, and the average person does not have the stomach to see their investment going down for years, unless that investment is small enough to tolerate (in which case it is not enough to make a big difference, for most people). What I think will work - not claiming that it will actually work - based on history: Invest in companies that are generating a lot of cash and a lot of profits, have a moat/USP/technology advantage, and are at the forefront of where the world is headed in terms of trends, or at least are following a sustainable trend. Yes, you need to identify the company. Yes, you need to take decisions: INTC vs AMD (1980s), YHOO vs GOOGL (2000s). But it gives you a much better chance of seeing a profit in your lifetime than index investing. You can still index invest, but only an amount you can "set and forget". This gives you the best of both worlds. Edit: (1) What I posted above is for long periods of no movement of stocks except downwards, as I believe we are going to see. (2) Index investing will work eventually and that is what I said above as well. The point is, the time period required for that. (3) I thought of posting this on my blog tomorrow, but it is past midnight here, and I wanted to see what HNers think. It is interesting to see the different opinions. Time may change some of your opinions (not about "index investing will not work" - that is not what I said above - but rather, about the protection offered by diversification, and what diversification actually means. Also, quoting this part again: "the average person does not have the stomach to see their investment going down for years, unless that investment is small enough to tolerate (in which case it is not enough to make a big difference, for most people)").
- refurb 4y ago
  Your strategy sounds like "pick winning stocks"? A strategy which has been show to produce (on average) worse returns than index investing. Index investing has produced a ~200% return in the past 15 years (from 2007 peak to now). Not sure what you mean by "a chance of seeing a profit in your lifetime".
  - alar44 4y ago
    Parent has literally no idea what he's talking about. Investing in indexes has always worked. Always. Over all time periods. Since they existed.
andsoitis 4y ago
diversify
lokar 4y ago
Using QQQ here seems like cherry picking (vs SPDR).
- franciscop 4y ago
  Exactly my thoughts, the author talks about S&P500 initially (which recovered "fairly" quick after the dotcom bubble burst) and then uses a different index to exemplify how the dotcom bubble took long time to recover.
  - ryl00 4y ago
    While the peak-to-trough drop wasn't as bad as QQQ's, the S&P 500 still managed to fall something like 40% from its dot com peak in 2000 over two years, and didn't fully recover until 2007. (And of course 2008 sent it right back down again for another five-ish years).
deleted 4y ago
[deleted]
01100011 4y ago
SNL skit from the dot-com era: https://twitter.com/WallStreetSilv/status/1522798778725675009 https://twitter.com/WallStreetSilv/status/152279877872567500... Does anyone have a solid understanding of how QE affects the economy? From what I've read, QE basically stays locked in the financial system as interbank cash. I think this can affect short term interest rates, and therefore affect lending(and money creation by the big banks), but otherwise that money doesn't really drive inflation, at least not directly. Based on that assumption, the real driver of inflation is the $5.4T in stimulus combined with supply-side shortages. It's looking to me like inflation is here to stay. On-shoring, demographics(aging boomers), the end of cheap energy and many materials, and other factors seem to be putting the US on a different course than we've been on for ~100 years.
- JKCalhoun 4y ago
  Why would $5.4T in stimulus that, as far as I know, came and went a year ago be causing ongoing inflation?
  - jokethrowaway 4y ago
    Because... you have more money in the market? It did spike up inflation when it was introduced and once inflation starts its effects tend to spiral. Look, we're also coming from years of QE. We've been screwed for years, it's just a matter of understanding when the government won't be able to support this monster they created and let th market correct itself. Instead of a series of small economic crises we'll get a massive one. Most of our economic crises are caused by governments interfering with the market.
    - JKCalhoun 4y ago
      I assumed it was Wall Street's bundling of derivatives that caused the last economic crisis.
  - ctennis1 4y ago
    Did it come and "go", though? A lot of that money was earmarked for local and state government programs, and at least from what I'm seeing, a lot of those projects haven't even taken place yet. Our local city hall, for example, is still trying to spend some of the money, which they will be reimbursed for after the projects are complete.
dehrmann 4y ago
Buying the dip doesn't mean you should try to catch a falling knife.
- baq 4y ago
  Bottom pickers have smelly fingers
adam_arthur 4y ago
If interest rates continue to increase, the market is in for a very rough time. COST is about 40 PE right now which implies 2.5% trailing yield. You can get 3.1% on a 10y treasury risk free right now. Of course equities have growth potential, but also risk, typically the spread between risk free rate and equity yields is much higher. Plenty of 30-40 PE companies at index level with close to 0 growth. Companies like NET still at 30x sales. If inflation persists and the 10y runs to even 3.5-4%, could be looking at close to 50% downside. However there are signs that the consumer is likely to collapse within the next 6 months, which should lead to disinflation, but also likely an earnings recession
- mercy_dude 4y ago
  > You can get 3.1% on a 10y treasury risk free right now I am a noob of how yields work and the math behind the 2.5% . I don’t buy treasury directly but through VUSTX and VUTY. I am actually DOWN, not up. At least that’s what my Schwab portal shows. I have COST on the other hand, bought prepandemic. I am up at least 20%.
  - dannyw 4y ago
    The yield is for new buyers. Your bonds, bought when yield are lower, is worth less.
    - mercy_dude 4y ago
      OK, so it could happen if I buy now it would be worth even less due to yields go higher which seems to be the trend.
      - adam_arthur 4y ago
        The market value of a bond will decrease, but the yield at purchase is locked in. But bond funds are different because they are constantly rolling money into new bonds, rather than just buying and holding a given set of bonds.
      - 4y ago
_uy6i 4y ago
While I appreciate many of the arguments being made - and there are countless similar situations (nifty 50 anyone) - that nasdaq is not the stock market it’s like 1/3rd of it… pop over to yahoo finance and look at the chart of the Russell 3000 Vs the nasdaq, this is why people recommend diversification…
levinhugo82 4y ago
Starting early is the best way of getting ahead to build wealth, investing remains a priority. The stock market has plenty of opportunities to earn a decent payout, with the right skills and proper understanding of how the market works. You can reach out to Norrel Smith on his email norrelsmith8 @ gmail .com
tracyholmes355 4y ago
known 4y ago
jasfi 4y ago
No technique always works. Buying the dip is just that, a technique, not a promise. This is a single example at a specific (long-term) time-frame with many other factors involved.
flipbrad 4y ago
I'd love to better understand how crashes start / propagate. A lot of the discussion seems to talk in slightly binary terms - "bear" vs "bull", "crash" as an on/off state, etc. But if we think inflation and reduced stimulus are going to cause a downturn in the stock market, I assume different sectors / types of companies will get impacted at different times? I'd love to see some theories/discussion of how that might play out. Timing dips might be super hard, but predicting how they play out, once they're underway, might be less difficult
- greenyouse 4y ago
  I can't answer the part about what sets off a crash. AFAIK, it seems to vary slightly for each crash. They all share similar valuation problems though. If a company is worth $10 but it's trading for $50 then there's a risk that it will drift back to its intrinsic value in a bear market (aka mean reversion). When the most heavily traded companies are all overvalued then you see a situation where a large market can crash. As investment firms realize that the investment isn't going through normal volatility, they'll sell off the shares and focus on other types of returns. The same goes for individuals but most will probably move after larger firms. A heavy sell off of a stock can cause the share price to drop. To some extent it probably happens in waves as negative events keep unfolding. That helps set the downward trajectory over the long-term. Unfolding macroeconomic conditions like raising the federal interest rate will also have an effect like it does now in the current crash. That raises the interest rate for bank loans so consumer and commercial lending slows down. That typically ripples out with knock-on effects for the broader economy. There are other factors at play like inflation and supply chain logistics that have their own knock-on effects too. There are trends in how to invest during a crash and bear market. Try looking for companies that are trading close to their intrinsic value that also offer a dividend. It's helpful to partition the companies by industry. Some industries are going to be fairly safe like healthcare, utilities, and defensive consumer products (e.g. toilet paper producers). Those companies are going to have steady business whether the market crashes or not. On the other side of the coin, there are okay sectors and bad sectors. You can check the general valuations across the sector and what's going on across companies. For example, energy companies are hot right now because of oil demand. That's okay because it doesn't track the crash of the larger market. It's heavily dependent on oil value though, good luck predicting what happens to the price of oil over a year out. A bad investment is something overvalued with bad future prospects. If you know people will be capital constrained and limiting big purchases, then cyclical industries like real estate might not be as good to invest in. It might be helpful to think about companies in terms of size and market valuation too. A growth stock usually has higher price to book because it's invested in R&D for future growth. They may not be making that money right now but the price is higher because they should at some point if everything works. That hurts when mean regression happens and the market price snaps back to book value. Value companies make money now and have lower price to book. When they go through a bear market they'll be largely unaffected by mean regression and have an easier time getting consistent returns. They usually pay dividends which helps over time too. I'm not sure if there's any consistent trend with how market cap size works in a crash or bear market. Check out some quarterly or annual economic outlook reports from major investment firms. They'll do the best at analyzing the current risk based on market cap if there is a trend. Those bear market investment strategies should be put behind the caveat that long-term investing is a better way to go. The market ups and downs smooth out over time so trading based on fundamental analysis of a company usually works out much better than speculating on the current trends. With a long-term mindset you can be less stressed about news since you'll get less caught up with the short-term market conditions. Stay the course and all that.
TedShiller 4y ago
NO strategy always works. Buying the dip is no different.
bfm 4y ago
I recommend reading the book “ Panic: The Story of Modern Financial Insanity” by Michael Lewis. It’s a series of articles and expert opinions before and after modern market crashes that helps gaining perspective of expert opinions during the ups and downs of the market.
MomoXenosaga 4y ago
The story of my country has been one of decadence and degeneracy since the 1960s but the 90s were peak Sodom and Gomorrah. I'm glad I experienced it.
lvl102 4y ago
Random thoughts: (1) People were deeply and extremely risk-averse coming out of the 2008 crisis. And now we are _starting_ to see the other end of that spectrum. However, we are still far from the heights/throes of the dot-com boom. Those were some insane times when nothing even mattered. (2) But keep in mind, the main driver of global economy is still increasing standard of living and middle class. And that’s far from over. We are still roughly 50% into land grab. (3) If current pace of inflation persists, then you want to be in equities chasing cash flow in enterprises with pricing power. What you don’t want is to stay in cash. It appears counterintuitive because of all the things we experienced in 2000 and 2008. A vast majority of investors still base investment decisions with those two crises in mind. It’s a significant handicap.
- VHRanger 4y ago
  Yes, extremely risk averse when you see behaviors like GME/crypto maniacs, tech stocks at price to earnings of 50-250
- martincmartin 4y ago
  If current pace of inflation persists, then you want to be in equities chasing cash flow in enterprises with pricing power. What you don’t want is to stay in cash. And if inflation ebbs, you want the opposite. Both outcomes are possible. So it's best to hold a well diversified portfolio and not try to time the market. Just rebalance once a year.
- ProjectArcturis 4y ago
  I think the NFT bubble and other crypto stuff is at least as crazy as anything from the dot-com bubble.
  - TheBigSalad 4y ago
    Sure but if it's all crashes it will have little effect on the economy. In fact, people expect it to crash and will sit through virtually any dump based on the volatile history.
  - unicornmama 4y ago
chris123 4y ago
Sorry, the standard of living for the night class has been declining for decades, and the rate of decline accelerating. Anyway, buy the dip works in the bull market and doesn't end up bear market, it's as simple as that.
lucidlive 4y ago
It feels like the vast majority of the comments are negative towards the stock market and essentially saying “we may not recover this time”. The thing is, we always think that. We always think this time is different. We always think this might be the end. When Covid struck? It was different because the world economy was shut. When 2008 happened? It was different. 2000? Different. 1987? Different. Markets will eventually recover. It will not take you 4 decades to recover. Sure, it could take years. But buy good companies, dollar cost average, and realize your loss isn’t realized until you sell. Also realize that the best time to buy stocks is always, but especially when people are flooding forums with negativity.
- rossdavidh 4y ago
  I feel like this comment is well addressed in the article, where it shows how long it would take to get back to even from various dip-buying scenarios. Some of the timelines are far longer than most people would be able to cope with.
  - abhayhegde 4y ago
    Not really if they dollar cost average (DCA). The specific examples talk about how a new high hasn't been made in nearly 16 years, but the case is not the same with DCA.
phs318u 4y ago
There's a marked difference between a dip and a cliff. A dip, by definition, implies a continuation through a period of depressed price/earnings/some-metric. Buying at the bottom of a dip is logical. A cliff implies a discontinuity. Almost nothing survives a fall of a cliff. Buying at the bottom of a cliff is therefore illogical. The key is identifying when something is heading for a dip or a cliff.
l8rlump 4y ago
Anyone have any book recommendations for learning economics?

357 points by makaimc 4y ago

Another thing to look at is the CAPE ratio. Even now, it's still above 30. We've gone from around a 37 to a 32. Mean/median is in the 16-17 range. DotCom crash in 1999 topped out at around 44. Still a lot of room to fall.

anonporridge 4y ago
Also known as the Shiller PE ratio, https://www.multpl.com/shiller-pe https://www.multpl.com/shiller-pe
onlyrealcuzzo 4y ago
The historic average for interest rates is considerably higher than it is right now. Considering the amount of public debt outstanding - it's extremely unlikely we're returning to those levels of interest rates long-term (short-term I suppose anything can happen). Interest rates have a huge effect on P/E. I wouldn't expect CAPE to match historic trends if interest rates don't.
- dannyw 4y ago
  1. Nominal interest rates are pretty normal right now. 3.3% on a 10y, that's not bad in history. 2. The government's debt is fixed. Only new deficit is on higher rates. 3. Completely agree, my thesis is that interest rates are going to continue to go up (IMHO 4%, 4.5%)
  - baq 4y ago
    US government can’t afford 4%. Rates will rise until something breaks, but 4% will be transitory if it gets there at all. My bet is things break sooner than that.
  - runeks 4y ago
    > 2. The government's debt is fixed. Only new deficit is on higher rates. This is not that relevant because the government is completely dependent on borrowing new money to pay of old debt.

a_c 4y ago

Can some of you share what are the ways to hedge against tumbling NASDAQ? The article is assuming we swing only a single bat. To me it seems spreading your investment into fixed dollar amount over a period of time is a sensible strategy.

baq 4y ago
In this environment? Nothing, just get out. Gold, short term bonds and dollars (UUP).

vitus 4y ago

> Buying the dip isn’t some secret strategy. Time is the secret strategy. Ah yes, the good ol' "time in market beats timing the market". Of course, that assumes that markets trend upwards in the (very) long term. Which... if past performance is any indicator of future performance [0], the past 100 years provide a fairly compelling narrative. [0] Another mantra: it's not.

chii 4y ago
> [0] Another mantra: it's not. it's the best indicator so far.
- tsimionescu 4y ago
  Given that global warming will cause the global economy to contract one way or another within the next 100 years (either we willingly contract to soften the blow, or keep going and producing more greenhouse gases until a massive crash), I really don't think this is the right time to think in these terms.
  - chii 4y ago
    Why can't technological advancement stave off climate change damage? Why cant renewables replace fossil fuels, and continue human expansion? Why can't space exploration and settlement be where the future growth occurs?
    - milkytron 4y ago
      Maybe those things can happen. But it's a race against time and we don't seem to be making progress on those fronts as much as we may need to.
      - chii 4y ago
        10 years ago, no one would predict that the cost of solar would drop by 80%-90%. There's still a lot of untapped potential in other forms of renewables too. The current bottleneck of batteries might be solved, i'm sure, in the near future. There's a lot of pessimism among the media. I, for one, am hopeful.

StanislavPetrov 4y ago

> Buying the dip isn’t some secret strategy. Time is the secret strategy. There is a Dutch guy out there with some rotted tulips who begs to differ.

chii 4y ago
when they say buy the dip, they refer to buying the stock market index (like S&P), not individual stocks like a tulip.
- xeromal 4y ago
  I think their analogy is that your investment in the Prussian/Holy Roman Empire/Carthage stock market can still end up ruined regardless of time.
  - chii 4y ago
    And yes, that's true. Geographic concentration is a real risk. if you purchased a world wide index, you will not suffer from such risk.
    - xeromal 4y ago
      Yeah, that definitely is the best way barring the existence of aliens. :)
    - barefeg 4y ago
      Dinosaurs beg to differ
    - grey-area 4y ago
      World indexes are 50% American stocks, they are not as diversified as you think. They’re also vulnerable to mass panic during a crash.
      - pertymcpert 4y ago

300bps 4y ago

The Federal Reserve has taken on $9 trillion onto their balance sheet to flood the economy with money. https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm https://www.federalreserve.gov/monetarypolicy/bst_recenttren... They’ve lowered short-term interest rates to effectively 0 and kept them there for quite a number of years. Federal and State governments have flooded the economy with stimulus. There is so much money that has been injected into the economy that it is no wonder that every asset has gone up so much. It is no wonder we have such high inflation. The trick now will be to stop it before we have a wage-price spiral where employees demand higher wages to compensate for higher prices which leads to even higher prices. Expect the Fed now to be raising interest rates, taking $47.5 billion out of the economy per month starting in June and then $95 billion per month starting in September. https://www.federalreserve.gov/newsevents/pressreleases/monetary20220504b.htm https://www.federalreserve.gov/newsevents/pressreleases/mone... I think what’s coming is going to look at lot more like the dotcom bust than it will 2008. So I think the article’s caution on buying dips this time around is warranted.

kmonsen 4y ago
I honestly think that’s not the main reason we have inflation now. Since every country in the world is seeing similar inflation I would think it’s supply side and not something any central bank can fight. I’ve always been Keynesian, but it faces the same problem as everything else, you need to be able to predict the future to do it well.
- 300bps 4y ago
  Fed balance sheet is about $9 trillion. This article gives details on $5 trillion in government stimulus. https://www.nytimes.com/interactive/2022/03/11/us/how-covid-stimulus-money-was-spent.html https://www.nytimes.com/interactive/2022/03/11/us/how-covid-... To put those numbers in perspective, the market cap of the entire S&P 500 is about $40 trillion. I hear what you’re saying about supply-side inflation but you don’t think flooding the economy with so much unearned money might be driving up demand a bit? A beach town near me, I paid $4,000 for a week to stay there two years ago. This year, an equivalent house is $15,000 per week. So now I’m driving six hours away to get a house for $10,000 per week. When people make $20,000 per month in stock market/cryptocurrency gains, it starts driving up demand for everything dramatically.

daenz 4y ago

>Why has this strategy been so profitable and painless? Well, because stocks have been in a bull market for thirteen years. If "buy the dip" works for a bull market, does "short the peak" work for a bear market?

daniel-cussen 4y ago
I would say so. I predicted this bull-to-bear market transition to the day (it started on Sep 27 when the Fed announced rate hikes) and yeah, everything's the opposite.
- deleted 4y ago
  [deleted]
kmonsen 4y ago
The problem is of course we don’t know how long bull or bear market will last. If I was a betting man I would short everything I guess, but I’m not. I’m also sure there are others with way more knowledge on when it’s going to turn around.
- hammock 4y ago
  > If I was a betting man I would short everything On a long enough timeline, the survival rate for everyone drops to zero
  - kmonsen 4y ago
    But then surely it doesn't matter. To short everything you have to hope it gets worse, but not nuclear war worse. Like just so bad that you can earn a ton of money, but not so bad that the money is useless. Or so bad that the fed decides to intervene as well.
__john 4y ago
The technical expression is "buy the dip, short the rip".

yowlingcat 4y ago

Buy the dip is always trumped by "don't try to catch a falling knife." If you can't tell the difference (I am not professionally trained to) then it may not be worth the effort.

JKCalhoun 4y ago
I assume catching a falling knife is at least preferable to buying the peak. :-)
- yowlingcat 4y ago
  An addendum is that if you, like me, are not professionally trained -- it will be impossible to discern buying the peak, a falling knife, or the dip.

throw0101a 4y ago

Nick Maggiulli: > Logically, it seems like Buy the Dip can’t lose. If you know when you are at a bottom, you can always buy at the cheapest price relative to the all-time highs in that period. However, if you actually run this strategy you will see that Buy the Dip underperforms DCA over 70% of the time. > This is true despite the fact that you know exactly when the market will hit a bottom. Even God couldn’t beat dollar-cost averaging. > Why is this true? Because buying the dip only works when you know that a severe decline is coming and you can time it perfectly. Since dips, especially big ones, haven’t happened too often in U.S. market history (i.e. 1930s, 1970s, 2000s), this strategy rarely beats DCA. And the times where it does beat DCA require impeccable timing. Missing the bottom by just 2 months lowers the chance of outperforming DCA from 30% to 3%. * https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-cost-averaging/ https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-co... The thing about trying to miss the worst days (get out before the dip, get in after), is that the 'best' (recovery) days are often not long after, and if you miss just a few of those your returns get hosed: > If you missed just the 25 strongest days in the stock market since 1990, you might as well have been in five year treasury notes. * https://theirrelevantinvestor.com/2019/02/08/miss-the-worst-days-miss-the-best-days/ https://theirrelevantinvestor.com/2019/02/08/miss-the-worst-... > This is actually a pattern, it turns out. The market’s worst days tend to be followed by its best days, according to research from J.P. Morgan Asset Management. > If you sell when the markets hit the skids, you’ll likely miss the upside. […] > According to J.P. Morgan’s analysis, the 10 best days over the past 20 years occurred after big declines amid the 2008 financial crisis or the 2020 pullback during the onset of the Covid-19 pandemic. * https://www.cnbc.com/2022/03/09/you-may-miss-the-markets-best-days-if-you-sell-amid-high-volatility.html https://www.cnbc.com/2022/03/09/you-may-miss-the-markets-bes...

GlennS 4y ago
> This is true despite the fact that you know exactly when the market will hit a bottom. Even God couldn’t beat dollar-cost averaging. I'm a bit unconvinced by the studies that say this, because I don't think the "buy the dip" strategy they're talking about is the same one that people are running. The studies describe waiting for a low point in a given year (or even across multiple years!) then lumping in all your money then. Whereas I think what people actually mean when they talk about buying the dip is shifting their dollar cost averaging buy-in by days, weeks, or at most a few months, while they wait for the market to get spooked. I don't do this at the moment. I had a "wait for the US president to say something stupid" strategy which seemed to work for a while, but of course I don't really have enough evidence to back that up.

fny 4y ago

Look at a chart of the S&P 500 from 1920 to 2008 and you'll notice something rather curious: the stock market has gone parabolic ever since the financial crisis. What made this period so unique? Tremendously low interest rates coupled with quantitative easing dissuaded capital from financing the real economy and instead encouraged herding and levering up in the financial economy for returns. At ever dip, it was an open secret the Fed would cut rates and ease again. At least for now, that game is over. We've had moments in the past when the markets had a similar panic (see 2018), but this period is unique due to the inflationary backdrop. Since 2008 we've never seemed to be able to create significant economic growth or inflation greater. The COVID fiscal canon blew growth and inflation skyward. The fed can't just turn on the printers again or cut rates until we hit proper a proper recession. That's when you buy the dip. [0]: https://www.macrotrends.net/2324/sp-500-historical-chart-data https://www.macrotrends.net/2324/sp-500-historical-chart-dat...

deleted 4y ago
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tyre 4y ago
> The COVID fiscal canon blew growth and inflation skyward. This is not true and has wrongly given credit to people who have said, since 2020, that COVID relief would cause inflation. Our current inflation is driven by supply chain issues (unrelated to COVID relief) and rising oil (unrelated to COVID relief.)
- candiddevmike 4y ago
  From what I've read, our current inflation is due to combo of inflated asset prices causing mortgages and rents to skyrocket along with corporate greed raising prices "because of inflation".
  - darkerside 4y ago
    You should probably widen the pool of what you read. You're not wrong (well, corporate greed tends to be a bit of a bogeyman), but it's certainly reductive.

nathanvanfleet 4y ago

Sad to think that investing in the stock market, which I have only been able to financially over the last 5 years might have been much riskier than I might have previously thought. What I previously thought as "okay I just leave it in the stock market for a bit of time to recoup" is something I am now realizing would likely have to be 10+ years. It's kind of funny because I was getting shaky about having money in the stock market back in December, and I held onto investing some of my money there. But I ultimately relented 4 months later to lose 10% within about two weeks (and after just index funds). Now it's much worse, and I guess I'll just leave it all there. And in 15 years I'll be back to where I was when I originally invested it.

chii 4y ago
you have to take risk to earn returns. Sometimes that risk actually eventuates, and you have to either keep going, or take the loss. That's why you must know the time horizon for your investments - if you know you need the money "soon", you cannot actually invest in the stock market.
- bequanna 4y ago
  You have to take calculated risks to earn returns. FOMO at your own risk. If you are 30 and don’t need the money you put in SPY until 70, don’t sweat it. You’ll be fine. But let’s not pretend blindly taking risk is OK because some return is expected. Time horizon and some relative valuation context is important. Buying into the stock or housing market at extreme historic levels of valuations like those in late 2021 and now GREATLY reduces your expected return over 5/10 years. If you don’t have the (extremely) long view, expect to lose some sleep watching your net worth over the next couple years.
  - deleted 4y ago
    [deleted]
  - srean 4y ago
    > But let’s not pretend blindly taking risk is OK because some return is expected. Exactly. I have seen this idea float around that just because they have taken a risky position they will be able get better rewards. Risk may be necessary for above market rate returns, but it is not sufficient. A proportionate amount of those taking the risk will be cleaned off the amount that was risked. Why do you think its not going to be you ! Of course when you use time effectively or use other hedges one can reduce the exposure.

mwattsun 4y ago

I lived through the dot-com crash and got out safely after hearing something so ludicrous that I had to ask myself "How insane does this industry have to be for someone to think they can build a high growth internet company out of home cement delivery?" My memory may be playing tricks, but it was something like that. After 2008 I became interested with crashes throughout history. There are so many fascinating little details that added up to one giant mess.

sharkweek 4y ago
Have you seen the movie Margin Call? There’s a great scene where the CEO of a Goldman-style bank is recapping the last 100+ years of global financial collapses and he mentions, “we just can’t help ourselves.” https://youtu.be/LtFyP0qy9XU https://youtu.be/LtFyP0qy9XU One of the best banking movies I’ve ever seen. Jeremy Irons absolutely nails his role.
- throwaway_1928 4y ago
  Will Emerson: Jesus, Seth. Listen, if you really wanna do this with your life you have to believe you're necessary and you are. People wanna live like this in their cars and big f-in' houses they can't even pay for, then you're necessary. The only reason that they all get to continue living like kings is cause we got our fingers on the scales in their favor. I take my hand off and then the whole world gets really f-in' fair really f-in' quickly and nobody actually wants that. They say they do but they don't. They want what we have to give them but they also wanna, you know, play innocent and pretend they have no idea where it came from. Well, thats more hypocrisy than I'm willing to swallow, so f em. F normal people. You know, the funny thing is, tomorrow if all of this goes t-s up they're gonna crucify us for being too reckless but if we're wrong, and everything gets back on track? Well then, the same people are gonna laugh till they p-ss their pants cause we're gonna all look like the biggest p-ssies God ever let through the door. Seth Bregman: Do you think we're gonna be wrong? Will Emerson: [long pause] No, they're all f-d. (edited for language)
  - iplist 4y ago

pdevr 4y ago

Index investing will work, if you live for a long time. The problems are, we do not live infinitely, and the average person does not have the stomach to see their investment going down for years, unless that investment is small enough to tolerate (in which case it is not enough to make a big difference, for most people). What I think will work - not claiming that it will actually work - based on history: Invest in companies that are generating a lot of cash and a lot of profits, have a moat/USP/technology advantage, and are at the forefront of where the world is headed in terms of trends, or at least are following a sustainable trend. Yes, you need to identify the company. Yes, you need to take decisions: INTC vs AMD (1980s), YHOO vs GOOGL (2000s). But it gives you a much better chance of seeing a profit in your lifetime than index investing. You can still index invest, but only an amount you can "set and forget". This gives you the best of both worlds. Edit: (1) What I posted above is for long periods of no movement of stocks except downwards, as I believe we are going to see. (2) Index investing will work eventually and that is what I said above as well. The point is, the time period required for that. (3) I thought of posting this on my blog tomorrow, but it is past midnight here, and I wanted to see what HNers think. It is interesting to see the different opinions. Time may change some of your opinions (not about "index investing will not work" - that is not what I said above - but rather, about the protection offered by diversification, and what diversification actually means. Also, quoting this part again: "the average person does not have the stomach to see their investment going down for years, unless that investment is small enough to tolerate (in which case it is not enough to make a big difference, for most people)").

refurb 4y ago
Your strategy sounds like "pick winning stocks"? A strategy which has been show to produce (on average) worse returns than index investing. Index investing has produced a ~200% return in the past 15 years (from 2007 peak to now). Not sure what you mean by "a chance of seeing a profit in your lifetime".
- alar44 4y ago
  Parent has literally no idea what he's talking about. Investing in indexes has always worked. Always. Over all time periods. Since they existed.

andsoitis 4y ago

diversify

lokar 4y ago

Using QQQ here seems like cherry picking (vs SPDR).

franciscop 4y ago
Exactly my thoughts, the author talks about S&P500 initially (which recovered "fairly" quick after the dotcom bubble burst) and then uses a different index to exemplify how the dotcom bubble took long time to recover.
- ryl00 4y ago
  While the peak-to-trough drop wasn't as bad as QQQ's, the S&P 500 still managed to fall something like 40% from its dot com peak in 2000 over two years, and didn't fully recover until 2007. (And of course 2008 sent it right back down again for another five-ish years).

deleted 4y ago

[deleted]

01100011 4y ago

SNL skit from the dot-com era: https://twitter.com/WallStreetSilv/status/1522798778725675009 https://twitter.com/WallStreetSilv/status/152279877872567500... Does anyone have a solid understanding of how QE affects the economy? From what I've read, QE basically stays locked in the financial system as interbank cash. I think this can affect short term interest rates, and therefore affect lending(and money creation by the big banks), but otherwise that money doesn't really drive inflation, at least not directly. Based on that assumption, the real driver of inflation is the $5.4T in stimulus combined with supply-side shortages. It's looking to me like inflation is here to stay. On-shoring, demographics(aging boomers), the end of cheap energy and many materials, and other factors seem to be putting the US on a different course than we've been on for ~100 years.

JKCalhoun 4y ago
Why would $5.4T in stimulus that, as far as I know, came and went a year ago be causing ongoing inflation?
- jokethrowaway 4y ago
  Because... you have more money in the market? It did spike up inflation when it was introduced and once inflation starts its effects tend to spiral. Look, we're also coming from years of QE. We've been screwed for years, it's just a matter of understanding when the government won't be able to support this monster they created and let th market correct itself. Instead of a series of small economic crises we'll get a massive one. Most of our economic crises are caused by governments interfering with the market.
  - JKCalhoun 4y ago
    I assumed it was Wall Street's bundling of derivatives that caused the last economic crisis.
- ctennis1 4y ago
  Did it come and "go", though? A lot of that money was earmarked for local and state government programs, and at least from what I'm seeing, a lot of those projects haven't even taken place yet. Our local city hall, for example, is still trying to spend some of the money, which they will be reimbursed for after the projects are complete.

dehrmann 4y ago

Buying the dip doesn't mean you should try to catch a falling knife.

baq 4y ago
Bottom pickers have smelly fingers

adam_arthur 4y ago

If interest rates continue to increase, the market is in for a very rough time. COST is about 40 PE right now which implies 2.5% trailing yield. You can get 3.1% on a 10y treasury risk free right now. Of course equities have growth potential, but also risk, typically the spread between risk free rate and equity yields is much higher. Plenty of 30-40 PE companies at index level with close to 0 growth. Companies like NET still at 30x sales. If inflation persists and the 10y runs to even 3.5-4%, could be looking at close to 50% downside. However there are signs that the consumer is likely to collapse within the next 6 months, which should lead to disinflation, but also likely an earnings recession

mercy_dude 4y ago
> You can get 3.1% on a 10y treasury risk free right now I am a noob of how yields work and the math behind the 2.5% . I don’t buy treasury directly but through VUSTX and VUTY. I am actually DOWN, not up. At least that’s what my Schwab portal shows. I have COST on the other hand, bought prepandemic. I am up at least 20%.
- dannyw 4y ago
  The yield is for new buyers. Your bonds, bought when yield are lower, is worth less.
  - mercy_dude 4y ago
    OK, so it could happen if I buy now it would be worth even less due to yields go higher which seems to be the trend.
    - adam_arthur 4y ago
      The market value of a bond will decrease, but the yield at purchase is locked in. But bond funds are different because they are constantly rolling money into new bonds, rather than just buying and holding a given set of bonds.
    - 4y ago

_uy6i 4y ago

While I appreciate many of the arguments being made - and there are countless similar situations (nifty 50 anyone) - that nasdaq is not the stock market it’s like 1/3rd of it… pop over to yahoo finance and look at the chart of the Russell 3000 Vs the nasdaq, this is why people recommend diversification…

levinhugo82 4y ago

Starting early is the best way of getting ahead to build wealth, investing remains a priority. The stock market has plenty of opportunities to earn a decent payout, with the right skills and proper understanding of how the market works. You can reach out to Norrel Smith on his email norrelsmith8 @ gmail .com

tracyholmes355 4y ago

known 4y ago

jasfi 4y ago

No technique always works. Buying the dip is just that, a technique, not a promise. This is a single example at a specific (long-term) time-frame with many other factors involved.

flipbrad 4y ago

I'd love to better understand how crashes start / propagate. A lot of the discussion seems to talk in slightly binary terms - "bear" vs "bull", "crash" as an on/off state, etc. But if we think inflation and reduced stimulus are going to cause a downturn in the stock market, I assume different sectors / types of companies will get impacted at different times? I'd love to see some theories/discussion of how that might play out. Timing dips might be super hard, but predicting how they play out, once they're underway, might be less difficult

greenyouse 4y ago
I can't answer the part about what sets off a crash. AFAIK, it seems to vary slightly for each crash. They all share similar valuation problems though. If a company is worth $10 but it's trading for $50 then there's a risk that it will drift back to its intrinsic value in a bear market (aka mean reversion). When the most heavily traded companies are all overvalued then you see a situation where a large market can crash. As investment firms realize that the investment isn't going through normal volatility, they'll sell off the shares and focus on other types of returns. The same goes for individuals but most will probably move after larger firms. A heavy sell off of a stock can cause the share price to drop. To some extent it probably happens in waves as negative events keep unfolding. That helps set the downward trajectory over the long-term. Unfolding macroeconomic conditions like raising the federal interest rate will also have an effect like it does now in the current crash. That raises the interest rate for bank loans so consumer and commercial lending slows down. That typically ripples out with knock-on effects for the broader economy. There are other factors at play like inflation and supply chain logistics that have their own knock-on effects too. There are trends in how to invest during a crash and bear market. Try looking for companies that are trading close to their intrinsic value that also offer a dividend. It's helpful to partition the companies by industry. Some industries are going to be fairly safe like healthcare, utilities, and defensive consumer products (e.g. toilet paper producers). Those companies are going to have steady business whether the market crashes or not. On the other side of the coin, there are okay sectors and bad sectors. You can check the general valuations across the sector and what's going on across companies. For example, energy companies are hot right now because of oil demand. That's okay because it doesn't track the crash of the larger market. It's heavily dependent on oil value though, good luck predicting what happens to the price of oil over a year out. A bad investment is something overvalued with bad future prospects. If you know people will be capital constrained and limiting big purchases, then cyclical industries like real estate might not be as good to invest in. It might be helpful to think about companies in terms of size and market valuation too. A growth stock usually has higher price to book because it's invested in R&D for future growth. They may not be making that money right now but the price is higher because they should at some point if everything works. That hurts when mean regression happens and the market price snaps back to book value. Value companies make money now and have lower price to book. When they go through a bear market they'll be largely unaffected by mean regression and have an easier time getting consistent returns. They usually pay dividends which helps over time too. I'm not sure if there's any consistent trend with how market cap size works in a crash or bear market. Check out some quarterly or annual economic outlook reports from major investment firms. They'll do the best at analyzing the current risk based on market cap if there is a trend. Those bear market investment strategies should be put behind the caveat that long-term investing is a better way to go. The market ups and downs smooth out over time so trading based on fundamental analysis of a company usually works out much better than speculating on the current trends. With a long-term mindset you can be less stressed about news since you'll get less caught up with the short-term market conditions. Stay the course and all that.

TedShiller 4y ago

NO strategy always works. Buying the dip is no different.

bfm 4y ago

I recommend reading the book “ Panic: The Story of Modern Financial Insanity” by Michael Lewis. It’s a series of articles and expert opinions before and after modern market crashes that helps gaining perspective of expert opinions during the ups and downs of the market.

MomoXenosaga 4y ago

The story of my country has been one of decadence and degeneracy since the 1960s but the 90s were peak Sodom and Gomorrah. I'm glad I experienced it.

lvl102 4y ago

Random thoughts: (1) People were deeply and extremely risk-averse coming out of the 2008 crisis. And now we are _starting_ to see the other end of that spectrum. However, we are still far from the heights/throes of the dot-com boom. Those were some insane times when nothing even mattered. (2) But keep in mind, the main driver of global economy is still increasing standard of living and middle class. And that’s far from over. We are still roughly 50% into land grab. (3) If current pace of inflation persists, then you want to be in equities chasing cash flow in enterprises with pricing power. What you don’t want is to stay in cash. It appears counterintuitive because of all the things we experienced in 2000 and 2008. A vast majority of investors still base investment decisions with those two crises in mind. It’s a significant handicap.

VHRanger 4y ago
Yes, extremely risk averse when you see behaviors like GME/crypto maniacs, tech stocks at price to earnings of 50-250
martincmartin 4y ago
If current pace of inflation persists, then you want to be in equities chasing cash flow in enterprises with pricing power. What you don’t want is to stay in cash. And if inflation ebbs, you want the opposite. Both outcomes are possible. So it's best to hold a well diversified portfolio and not try to time the market. Just rebalance once a year.
ProjectArcturis 4y ago
I think the NFT bubble and other crypto stuff is at least as crazy as anything from the dot-com bubble.
- TheBigSalad 4y ago
  Sure but if it's all crashes it will have little effect on the economy. In fact, people expect it to crash and will sit through virtually any dump based on the volatile history.
- unicornmama 4y ago

chris123 4y ago

Sorry, the standard of living for the night class has been declining for decades, and the rate of decline accelerating. Anyway, buy the dip works in the bull market and doesn't end up bear market, it's as simple as that.

lucidlive 4y ago

It feels like the vast majority of the comments are negative towards the stock market and essentially saying “we may not recover this time”. The thing is, we always think that. We always think this time is different. We always think this might be the end. When Covid struck? It was different because the world economy was shut. When 2008 happened? It was different. 2000? Different. 1987? Different. Markets will eventually recover. It will not take you 4 decades to recover. Sure, it could take years. But buy good companies, dollar cost average, and realize your loss isn’t realized until you sell. Also realize that the best time to buy stocks is always, but especially when people are flooding forums with negativity.

rossdavidh 4y ago
I feel like this comment is well addressed in the article, where it shows how long it would take to get back to even from various dip-buying scenarios. Some of the timelines are far longer than most people would be able to cope with.
- abhayhegde 4y ago
  Not really if they dollar cost average (DCA). The specific examples talk about how a new high hasn't been made in nearly 16 years, but the case is not the same with DCA.

phs318u 4y ago

There's a marked difference between a dip and a cliff. A dip, by definition, implies a continuation through a period of depressed price/earnings/some-metric. Buying at the bottom of a dip is logical. A cliff implies a discontinuity. Almost nothing survives a fall of a cliff. Buying at the bottom of a cliff is therefore illogical. The key is identifying when something is heading for a dip or a cliff.

l8rlump 4y ago

Anyone have any book recommendations for learning economics?