The Boring Invstr - Your Simple & Digestible Weekly Investing & Finance Newsletter

Welcome Back to The Nineteenth Edition of The Boring Invstr!

Hello Boring Invstrs,

Embracing Opportunity: Reshaping How You Think About Market Downtrends, Corrections, and Crashes

Market pullbacks, corrections, and crashes are scary. An emotional atmosphere filled with uncertainty, fear, and panic brings many investors out of the market disrupting its magical long-term potential. However, as Warren Buffett says, “Be fearful when others are greedy and greedy when others are fearful.” In fact, he identifies bad news as “an investor’s best friend.” Pullbacks, corrections, and crashes are core principles of Warren Buffett’s investing thesis. So why can’t everyday, regular investors embrace and seize the opportunity?

The answer is simple.

We are humans.

We cling to fear, bad news, and uncertainty.

This tendency to hold onto fear often renders us inactive when action is needed.

With that being said, let’s explore the case for acting during a market correction or crash:

Periods of recessions bear markets, and pullbacks offer a unique chance to invest in strong companies and index funds at a discount to their true or intrinsic value. These moments contrast with bull markets, where top companies and market indices are acquired at a premium to their true value, making downturns an attractive time to buy at a discount.

The stock market operates as a reflection of future market sentiment. It is driven by projections of future valuations and growth, explaining why the share prices of strong companies are priced at a premium during bull markets.

It's essential to recognize and understand the dynamics of different market trends:

Understanding the distinction between market corrections and crashes is vital. Market pullbacks or corrections are essential components of the financial and business cycles, functioning to prevent economic overheating. Market corrections are somewhat predictable, occurring every twelve to eighteen months. Conversely, market crashes lack a specific pattern but have taken place around twelve times since 1950.

Corrections, with around a 14% dip, are milder and shorter, typically averaging nine months for a full correction and recovery cycle.

Market crashes entail around a 35% drop from market peak lasting between a year or two. Recovery periods for crashes can extend around two and a half years with a typical drawdown averaging 40%. While it would take an 80% market rebound to fully recover losses, historical data reveals that six out of seven occurrences since the Great Depression witnessed full recovery and new highs within a five-year time frame.

Regardless, both crashes and corrections offer a great opportunity to buy strong companies and market indices at a discounted rate helping you to dollar-cost average.

Unless you are less than two years from retiring, it is wise to keep your money in the stock market. Backed by historical data of post-downtrend bull markets, maintaining your investment positions helps minimize entry costs, cushion the affects of short-term volatility, and mitigate the risks tied to market timing.

Allowing the power of compounding and regularly investing a fixed amount every month (dollar cost averaging) will allow you to recoup your losses faster than historical data suggests. Understanding the cyclical nature of the market and embracing downturns as opportunities can lead to more informed and confident investment decisions.

That’s it for this week!

Wishing you fruitful investing and a great week!

Trey