Fear of a crisis or a very good opportunity?

Every time I was faced with a fear, I had a choice between being consumed by it and facing it directly and yes, I ran away from it as much as I could, but with no luck. I ran until I turned away and faced the fear, catching her in the eye.

I acted many times, even though I was terrified. I looked into the eyes of the fear of poverty, humiliation, deprivation of liberty, authority, or abandonment, and this dissolved the fear.

Fear, as an emotion, is deeply rooted in the structure of any human being - with rare exceptions, when it is necessary to avoid danger, but most of the time, it prevents you from acting calmly, rationally, organized, in your favor.

This is why, when you are in danger, the first thing you need to do is calm down and only then analyze the situation. Fear shuts down your ability to think rationally.

Economy vs. Stock Exchange

First of all, we need to make it clear that the evolution of the stock market is not always directly correlated with the evolution of the economy.

It happens quite often that the stock market grows when the economy declines and decreases when the economy grows. However, in the long run, the stock market and the economy are intertwined, given that the largest companies in the world are listed on the stock exchange and these companies need profits in the real market to justify their market price.

This temporary decoration is due for several reasons:

The stock market anticipates a few months in advance what will happen in the economy;

Not all companies in the economy are listed on the stock exchange, but usually, companies that are much larger and more efficient than the average in the economy;

The stock market is also heavily influenced by market liquidity. If there is a lot of money in the market, the stock market will increase; if the money is hard to come by, the stock market will go down.

Some definitions

Economic crisis - a period in which asset prices are falling sharply, businesses and consumers are unable to pay their debts and financial institutions are facing a lack of liquidity.

Economic Recession - Two consecutive quarters of an economy's declining GDP. They are a natural component of an economic cycle.

Bear market - A decrease in stock markets by 20% or more.

Bull market - A growing stock market.

Large stock market corrections - Decreases between 10-20% of the stock markets.

Minor corrections - Decreases of up to 5%.

How often do we have small, large, and bear market corrections?

We often have corrections of -5%, -10%, and, once every 4 years, on average, a Bear market, ie a correction of over 20%.

There were also 2 cases in which we had corrections of over 50%, more precisely in 1929-1932 and 2008-2009.

Large corrections of over 50% are very rare. However, any investor will catch at least one such correction in his life.

A bear market lasts on average around 1 year, but there are bear markets that last 2-3 months (as was the case, for example, in 2020) and there are also bear markets that last 2-3 years (as was the case in 2000-2001, when it lasted almost 2 years).

What I mean is that all these bear markets are natural periods in the evolution of stock markets and are part of the normal cyclicality of stock markets and the economy in general.

Despite these corrections, the S&P 500 index has yielded an average annual return of almost 10% in USD over the last 100 years and, most importantly, a net inflation return of almost 7%.

This yield was achieved despite some major events:

1. Two world wars;
2. The Great Depression;
3. Countless financial and economic crises;
4. Pandemics;
5. The rise and decline of communism, including the Cold War with the USSR;
6. And more.

Human society has proven to be incredibly adaptable and, just like an elastic band, tends to return to growth.

What will happen in the future?

We can't predict the future because we don't have a crystal ball, but we can make an estimate based on the past and the factors we know today:

1. It is estimated that the world's population will continue to grow for many more decades to come;
2. There are still many areas (whole continents) where consumption is still at subsistence level, as almost the whole world was at subsistence level 100 years ago. We can estimate that in the coming decades the standard of living will continue to rise (we do not know at what rate) in many parts of the world;
3. Technology ensures an incredible increase in labor productivity. We can estimate that productivity will continue to grow at a steady pace, as long as humanity is "obsessed" with progress, evolution, and science.

Given that the above three forces are real and the estimates are reasonable, my question is who will benefit from all this:

1. Increasing the number of consumers and producers;
2. Increasing consumption;
3. Increasing labor productivity.

I'm sure there will be many beneficiaries, but the main beneficiary will be the Economy and implicitly the companies listed on the stock exchange that absorb a large part of what global consumption means (Coca Cola, Visa, Nestle, and Google are companies that sell globally and not only in their countries of origin).

It's clear in the long run, but what do we do in the short term?

Well, I was saying in other articles, "Can you still hope for financial independence in the current context?" that, if the stock market and the assets, in general, are not corrected from time to time, then the one who wants to accumulate assets can NOT accumulate too fast. All are already too expensive and have less growth potential.

When all is well in the world and society, then assets come at very high prices. When uncertainty arises, then the assets are corrected.

Thus, for an investor who is in the accumulation period, the correction periods are the chance to catch up with the others and to achieve in one year what he would have achieved in another 4-5 years in normal mode.

Now, this means that you have to assume that:

1. There are also corrections;

2. That there are short corrections of 1-2 months (when it is easy to buy on the correction and get the reward after 3 weeks :)));

3. That there are longer corrections, which can last 12 months, 24 months, or even longer - where there will be some more pain, but the subsequent rewards will be commensurate.

It is like in any other field of life: the first part of your career, the first months at the gym, the first years of a business - you have some pain, but you will be glad that you were persevering in that first part when you reap the fruits after a few years.

That is if you want the reward to feel otherwise, of course, you can give up the first obstacles, but you will not have the reward either.

About 2022

I said last month that this year we do not have a correction similar to the one in 2020 (or the one at the end of 2018) and that we should dose our purchases.

The idea is to dose our efforts and expect this correction to be a little longer. I don't know how long, but we see that the correction is much slower than what we had in the last 2 corrections (2018 and 2020) - so things happen more "slow".

At the same time, we also have time to act, analyze, to accumulate.

The good and the weakest assets will decrease and probably will decrease - it is important that we gradually collect the good ones, which have real chances to bring us new maxims after maxims, when the good times come again.

Good assets: that is, fundamentally solid. More specifically, to be cash machines… horse.

Thus, for our mental health and to build our resilience, let's assume that this correction will last 2 years and prepare to persevere to follow our plan of monthly purchases and possibly additional purchases for larger corrections… for at least 2 years.

Of course, I have no idea if these corrections will last 2 months or 2 years or how deep they will be, but it is much more useful for me to prepare mentally and for an unfavorable scenario.

Thus, I suggest you continue working, produce, invest, and wait for the reward, not today, not tomorrow, but in 2 years minimum. Just like in life 🙂 First give and then receive 🙂

And I think the reward will be worth it. All the time, the markets have recovered so far and are very likely to do so in the future (excluding major catastrophes such as the extinction of dinosaurs - those events are unpredictable :).

I will be here, as I have been for 6 years now (this week Science Science turns 6) and I will continue to write and deliver valuable information.

Moreover, if you want to work closely, tomorrow morning I will make you a proposal that will involve a long-term educational program in which I will teach you everything you need to know to achieve financial independence.

See you soon!

P.S. If you like to read while drinking coffee, you can offer me a coffee too.