Lessons from a Manic Stock Market & Flash Correction

Last Monday morning, I was feeling absolutely sick to my stomach.

The Dow had just opened the day 1,000 points below where it had closed the previous Friday. And this was after it had lost an additional 1,000 points the week prior. The S&P 500 and NASDAQ indexes were suffering from similar losses. All told, the three major U.S. markets were down about 12% in just 4 trading sessions and 18% from the all-time highs earlier in the year.

Personally, I was out tens of thousands of hard-earned dollars. I had just lost multiple years of living expenses in a mere week. I was feeling jittery and nauseous.

What caused this sudden dramatic plunge? GDP growth in China was slowing year-over-year from a torrid 8% to a slightly less, yet still torrid 7%. The result: the millions of new, inexperienced Chinese retail investors that all had piled in to the market were now scrambling to the exits to try to preserve some of their inflated bubble gains of the past year, causing a huge recent decline in the Shanghai Composite index. The slightest negative news had burst the bubble.

It was right then that I had to talk my emotions down…

“You’ve been through this before. Back in 2008, you panicked and sold on the way to the bottom. Now, look where the market is today. China doesn’t matter THIS much – the market is overreacting. If you sell now, just watch, we’ll get a bounceback tomorrow and you’ll have locked in those losses and buying back in at a higher level later on.”

So, I didn’t. And here’s what happened next…

Rationality won over emotion and within the same week, the market had clawed back half of its losses. Had I followed my gut and panic-sold, I would have missed out on those return gains.

Wednesday morning a colleague at work, whom I’d guess was in his mid 20’s, sent me a message of panic:

“Hey, I saw that I lost $3,000 in my 401K the other day. I thought those returns were guaranteed with the 401K match.”

me: “No. 401K matching does not guarantee market returns. Investing returns are never guaranteed.” (I wisely substituted this for: “Is that it? Consider yourself damn lucky, YOU PUNK!”)

him: “Bummer. I am freaking out.”

me: “Don’t panic. You’re young, what happens today won’t matter 50 years from now. Besides, you’re probably still better off than from where you started, right?”

later that day, after a 4% gain…

me: “There you go, look what happened today. And in 50 years, you won’t remember any of this.”

him: “The market taketh, and the market giveth.”

me: “Damn right.”

Now, to be fair, my colleague and I could go on to lose another 10% in the next day, month, or year. Or… we could gain another 10% in those same time frames. The point is – nobody knows.

You. Just. Can’t. Time. The. F’ing. Market.

Without question, the U.S. economy is actually in much better standing now (with the Dow now priced at 16,600) than it was when it was priced at 17,500 a week earlier or even 18,400 earlier in the year. We haven’t seen y/y GDP growth at 3.7% in over a decade and consumers are feeling more confident than they have in a long time. We didn’t know these things before sell-off, but now we do. Yet, we’re 1,000 and 2,000 points off those highs – and the only real discernible reason why is because Chinese investors got greedy and panicked, and then U.S. investors then did the same.

So, what can we take away from these developments? There are many lessons…

  1. Investors behave irrationally.
  2. The market is priced irrationally.
  3. You cannot accurately predict when it will go up and when it will decline. Trying to time the market is a fool’s game.
  4. When you have the strongest emotional urges to buy and sell are precisely when you should do the opposite.
  5. The opening on Monday (when panic was at its height), in short-term retrospect, provided an excellent buying opportunity.

All important lessons. But the biggest takeaway is this: What happens in 1 day, 1 week, or 1 month in 2015 will have almost zero impact on where the market will be in 2025 and even less impact on where it will be in 2050. Want further proof of that? Look back over the last 35 years. The market, despite 3 major crashes and dozens of similar 10%+ “corrections”, is up about 1,636% over that time. 1,636%!!! That is the power of compound investment returns.


stock market correction

A panicked investor in 1980 who pulled skin out of the game and bought back in decades later would be absolutely devastated for missing out on those long-term returns.

About the best you, I, or anyone can do is the following:

  1. Passively invest in low-cost ETF’s and index funds.
  2. Consistently add to your investment positions over time and re-balance periodically.
  3. Do not panic sell. Buy when others are selling.

You’ll thank yourself later.

Update: the market has returned to its pre-correction levels, for further proof that market timing doesn’t work.

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