This really does sound illogical. How is this possible?
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Doesn’t sound illogical, it’s the concentration, they go up more and go down more…Also if it’s a sector crash then they all go down together.
I still don’t understand. If I don’t have shares from this specific sector, then the individual shares won’t go down as much as the index.
It’s the “all” shares that’s a bit too generic (obviously, if some of the individual shares that compose an index go down more than it does, others will go down less to have the weighted average be the index).
I guess it’s likely the more hyped, prominent shares that laymen investors are more likely to have (because they’ve heard of them more) fall more as they may be linked to the actual reasons the market is going down.
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I think TeaGhost was talking more broadly that in a crash an index may fall, but individual stocks which are part of the index may fall more (or less), not a hard and fast rule.
Yes, that’s true, they may even go up if people flock to sectors.
If all stocks fall by 50% then index will also fall 50%
But no one knows all stocks in index. So in most case individual stocks (for stock pickers) are from the group of most common popular stocks.
If you think of dot com era, Nasdaq comprised of most popular stocks at that time. It fell much harder than S&P 500.
So if someone had top Nasdaq stocks in their portfolio, their decline could have been 80% or so.
Most likely that was the spirit of the comment.
In today’s era the AI potential has increased the earnings forecast for a certain group of companies. This is why we don’t see the big issue in forward PE yet. But I also think lot of this is driven by Capex which is pushing order books to be full .
As we know capex doesn’t always mean ROI. If everything goes well then it’s great. Demand will come and ROI will be realised. But if the end use demand doesn’t come in the same proportion, the valuation and price of the same companies can fall very fast. And on top the same companies are taking loans against their valuation. So the loans would also be defaulted.
In most bubbles there is a story , in AI bubble the story is that AI will create net accretive economic growth that we have never seen before. If that happens then we all would be happy. But if that story doesn’t come to fruition lot of companies will have very serious losses. Open AI , Anthropic etc really need to show real revenue and real profit to match those valuations.
So if stock pickers are exposed heavily to top names. Their decline will be much higher than broad index.
Analogy would be Spanish real estate boom where billions were spent on capex to build Real estate. Eventually rent or income from them was zero.
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I think how we feel these days, most likely investors felt the same in 90s as well. It almost feels a golden age until the rug is pulled under our feet. But similar to the investors of those days , we have convinced ourselves the best option for us is to be part of bubble rather than be left behind and there is no alternative.
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To the contrary today though, the tech companies are the biggest money printers ever created.
Tech companies were already making money. But now we are talking about ROI on their AI Capex. We are not talking about Traditional businesses
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In a crash, all correlations go to 1. no matter how densitive / qualitative / value factor your holdings are. Everything goes down the same. The quality of your share only matters during later recovery.
What always happens is that some random shares get less trouble. This not based on fundamentals or whatever - its a completely chaotic process where a tiny move here leads to a major swing there. Given its absolutely unpredictable and illogical - chances are there that you don‘t hold these shares / not in their Index weight. Meaning that for most investors, no matter how diversified… their shares crash more than the Index and a few random luck ones get away with less of a loss. These ones are the poorest ones as they devop the temdency to mix up Chaos teory with strategy later on
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Dotcom bubble has been evidence to the contrary.
Tech stocks went down more than others and more than value.
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I don’t really understand the chaos argument. Even if it is true (which I am not really sure), that shouldn’t result to your statement “…their shares crash more than the Index and a few random luck ones get away with less of a loss”
In order for most to fall more than the index you need an asymmetry since the index fall is calculated as the cap weighted average.
The only thing that comes to mind in favor of your statement is that typically small/mid cap fall more than large companies and since the number of the first is much higher and contribute less to the index (their weights are far smaller) → Higher number of stocks fall more than the index.
Assuming a broad market index like FTSE Global All Cap.
Another one is that in a really big crash the companies that go to zero will eventually be removed from the index (I suppose before going to zero) reducing the impact to the index fall but still impact your returns as individual stock picker… But I don’t really know the mechanics…
or you could have one industry e.g. dotcom/AI collapse which drags down the index. e.g. if tech sector crashes 80% and rest crashes only 20%
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Correct, but still it depends on the market cap of the sector and the number of stocks in it.
Yes, in manias, I guess normally everybody is invested in the popular stocks which are then heavily weighted.
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Maybe, maybe not. I don’t know, but wouldn’t just assume. I see such an assumption as a precondition for a statement about shares falling more than the index.
May I add, a crash is a time, when you don’t care anymore if single stocks or the index dropped more. 
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Maybe that depends on the stocks and ETFs that you hold! 
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I think many would. The amplitude of the crash matters and some (many?) people are subject to regret, failing to validate the reasons why they chose their stocks in the first place. A stock picker might regret their choices if they fall more than the index and revel in their genius instead if they fell less, even if it was the exact same decision process that led to the stocks pick and luck is involved.
What really matters is why we make our choices and to make sure we’re ok with the consequences when we make them, so that we don’t nourrish regrets if good decisions lead to bad outcomes but reading this board, I’m sure there are people who would be deeply emotionally affected by a bad outcome no matter how good their decision was and may rejoice of a good outcome no matter if their decision process was lackluster.
Rather than assuming so many things , we can simply wait.
In some months or years, when the crash happens , we can check which stocks fall more than index and which do not.
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Plenty of historical crashes to check beforehand. The stocks that went to zero might be lost to time, though.