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What I learned from 4 market crashes

What I learned from 4 market crashes

One upside of a receding, gray hairline is that I’ve seen a lot. Over 30 years in finance, I have lived through four significant market crashes.

Sooner or later, we’ll have another one. Maybe it started today. Maybe it is months or years away. Here’s what I learned from the past.

I have seen, first-hand, four significant crashes:

  1. The Japanese crash, which began in 1989. The market fell almost 50% over three years, rebounded modestly, fell another 50% a few years later and is still 1/3 below its all-time high 30 years ago. I lived in Tokyo near the market peak.
  2. The Asian financial crisis of 1997-1999, which saw stock markets, currencies and economies collapse, from South Korea to Thailand. I lived in Asia as stocks ran up for 10 years and throughout the crisis.
  3. The dot com collapse in 2000-2001, when smaller dot com companies and very large tech companies lost much of their value — and when many went bankrupt. I was advising telecom companies at the time.
  4. The great recession of 2007-2009, driven by a housing market bubble. The US market lost 50% in 12 months, and real estate did even worse.

 

The lessons:

  1. Crashes are very hard to foresee. If they were easy to spot, bubbles would never develop. With thousands of pundits, someone will always correctly predict a crash. Unfortunately, you cannot know in advance whom to believe.
  2. Before a crash, there are logical reasons why there will be no crash. Those reasons turn out to be flawed. Examples: Japan had a world-beating culture and economic model. So did the Asian “tigers” as they went through a transformation out of poverty. The internet was the most important technology in decades. And the US housing market had never gone down. In each case, those were very good arguments … which were proven wrong.
  3. You cannot “time” buying at the bottom. In every case — and I remember this most clearly — the markets rebounded only after virtually everyone had “thrown in the towel”. Don’t sell as the market falls and think you will know when to buy back in.
  4. Crashes — even big ones — are not always contagious. Japan is the best example. It declined, and has stayed down, as many other markets grew dramatically. Yes, in the “great recession”, most markets fell in lockstep. That is not always true.
  5. Every crash is unique.

 

I cannot predict the next crash, and I cannot identify someone who can. Please don’t take this personally, but few of you can, either. My solution: if you cannot outlast a long, severe drop, diversify. That means owning plenty of bonds — the dull and the unloved. Then be patient.

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