Most of the time, successful investing is a waiting game. It’s about picking the right time to buy and sell. That also implies there are bad times to buy, bad times to sell and times when you’re better off holding onto your cash while you wait for better opportunities.
Looking back at stock market history provides a unique insight into why the stock market crashes and leveraging that knowledge can help predict future crashes.
Here are the most famous stock market history crashes and what we can learn from them to easily make money and avoid losses.
1. Black Tuesday (1929)
On October 29, 1929, a record 16.4 million shares were traded on the New York Stock Exchange. These record-setting trade volumes were the result of panicked sellers frantically trying to cut their losses.
The Dow Jones dropped 25% and investors lost $30 billion over a four day period. That’s the equivalent of $296 billion today.
It was Black Tuesday that kick-off the Great Depression.
A contributing factor to the Black Tuesday selling panic was the way we sold and bought shares at the time. A new method of buying stocks, called buying on margin, had emerged. It meant investors could borrow to buy stocks with only 10-20% down.
The combination of overly optimistic markets and easy access to funds (by taking on debt) were a recipe for disaster. It leads to investing without caution.
When stock prices started to fall, lenders went on to call their loans. Panic spread like wildfire from there as investors desperately tried to get the funds they had borrowed out of the market so they could repay their loans.
Having confidence in an over-optimistic market is the primary lesson learned from Black Tuesday. When we trust the strength of the market without caution, the results can be devastating.
Many people hit by Black Tuesday found themselves having wiped out their life savings to pay loans. In some extreme cases, people even jumped out of windows. New York hotel clerks would cynically ask incoming guests if they wanted a room for sleeping or for jumping.
It remains the worst stock market crash in history.
2. Black Monday (1987)
On October 19, 1987, the Dow Jones dropped 22% in a single day. The largest 1-day percentage drop ever.
While there were no clear indicators to predict such a significant and drastic drop, there were some signs of slowing economic growth.
Experts to this day cannot agree on the cause of the drastic one day drop.
All though Black Monday did not bring on another Great Depression, it did start a new era of stock-market volatility.
What it teaches us is the stock market can be fickle, and crashes can be impossible to predict.
On the other hand, it shows us that the market can recover quickly even after the most drastic tumbles.
Keeping emotions in check is also an important takeaway from Black Monday. If you have confidence in your portfolio because of the quality of your investments, it becomes easier to keep cool when the sky is falling.
3. Dotcom Bubble (2001)
The 1990s were a time of rapid technological advancements including the commercialization of the internet.
Everyone was talking about the internet and investors were excited about the idea of investing in “the next big thing“. Investors blindly threw their money into any and all internet companies.
This fad caused the value of internet-based companies on the stock market to skyrocket.
Unfortunately, investing in a fad without caution or research often leads to losses.
Most of the internet companies at the time were doomed to fail. Investors were putting their money into start-ups with the hope of one day turning a profit because everyone else was doing it. F.O.M.O got the best of investors.
By 2001, investor money started to run out and most of these tech start-ups which survived on investor money disappeared from existence. Hundreds of millions of dollars evaporated into thin air. The Nasdaq lost 78% of its value.
The lesson learned from the Dotcom Bubble is the importance of research and due diligence when it comes to picking investments. Selecting stocks based on how trendy they are is a no go zone.
Investors need to take the time to look at results, management, industry, competition, and other factors rather than blindly following the crowd.
4. The Housing Market Crash (2008)
Last but not least, the housing market collapse of 2008.
The root cause of the 2008 crash was the real estate market.
Banks gave out loans to individuals with questionable credit.
They then turned around and repackaged these loans into mutual funds, corporate assets and pension funds. The issue with repackaging them was that banks had chopped up the original (worthless) mortgages and resold them in tranches.
Once real estate prices started dropping and the federal funds rate began rising, the system collapsed like a house of cards.
Over the course of 2008, the S&P 500 fell almost 58%.
The key takeaway from the housing market crash is that companies are often affected by factors outside their control.
Investors must keep an eye on all economic conditions, not just the company specific conditions.
The real estate market and the stock market are two entirely different markets, yet the collapse of one quickly led to the collapse of the other.
Nevertheless, most high-quality companies survived the crash and soon went on to climb to the highs we see today.
If you have all of your money in the market before a crash, chances are you won’t have any cash available to buy cheap stocks following a crash.
This is why sitting on your money and waiting for a crash when valuations are as high as they are right now can be a very effective investing strategy.
At Making Coins Count, we focus on helping you find companies that are solid enough to survive and thrive no matter what the market does.
If you’re worried about stock market crashes, I’ve got a free 10 Ingredient Investing recipe where you’ll learn how to avoid losing money on the market.
Here are some other articles to help you cut your losses and grow your gains:
- 6 Powerful Steps to Make Money Investing for Beginners
- How to Start Investing With Less Than $100 and ZERO Overwhelm
- How to Invest In Stocks: 3 No-Brainer Hacks For Newbie Investors
Do you have any takeaways from stock market history to easily make money and avoid losses?