How to prepare to the possible future crash?


#41

@julianek what you’re saying makes a lot of sense. I guess I should not discourage people to invest actively (but of course this means they will need to obtain the knowledge first and then make the tedious work of screening the company’s business model and finance).

Career risk makes perfect sense to me. I’m lacking the knowledge/data to see how much of the market is controlled by pension funds, index funds or hedge funds. But I bet there is a portion of the market where beating the market is a requirement to keeping your job :slight_smile:

I don’t mean that managing billions is an advantage in investing. It’s more of a proof to me that the person in charge knows what he’s doing and has proven education and track record in order to get that job. Sure, guys like Michael Burry (as portrayed in The Big Short) are a minority, but they do exist.


#42

On a side note, Burry in the Big Short is a good example of what career risk must be like. Have you noticed how, because he has chosen the unusual path, investors want to withdraw their funds/sue him? What a stressful environment it was at the time? Most managers would have given up in this situation.
In my opinion, part of the reason why he went through anyway is his Asperger Syndrome.


#43

Well, actually I do feel pretty stupid and naive even though I read a lot about this topic. But I will feel even more stupid if I invest at this moment in time when everyone is saying that the market is overpriced and we’re heading to a correction. I’m also pretty risk averse, so ETFs, not stocks feel right to me.

However from what I read so far I make a conclusion that the rise of stocks in price is a very cyclical thing and it’s not clever to buy expensive and then freak out and sell cheap (I think I’m a good candidate to do just that :exploding_head:), but it’s OK to sit through a crash if you’ve already made some money. So I’m inclined to do nothing now, just learn and prepare. And I’m thankful for all the information on this forum.


#44

this is the very heart of indexing, it’s greatest strength to avoid this!

this is an extremely important, self-honest conclusion! whatever you will be investing in later, make sure you will not panic at expected dops in prices. mixing cash and other assets is the key, even eventually commodities. depends on your taste and risk tolerance

thats not a bad thing to do. of course passive indexing philosophy says on average you lose by staying out of the market. on the other hand, mistakes that you later regret might be more costly than missing out some gains. it took me 3 years of reading up before i knew what i wanted :slight_smile: but, after spending this much time, i am highly confident of what i am doing, and little impressed by any new “hip” fashion or guru coming up. this keeps my investments at steady course


#45

Dollar Cost averaging!
You start small and grow. So you can get used to it and also can make small mistakes if you “wish”.
DCA isn’t a solution for seasoned investors, but I believe it’s the best solution for “unsecure” people and also if you believe somehow that “there will be a crash soon” ©


Mustachian portfolios
#46

I guess DCA can encourage hesitant investors, even though it’s been empirically proven that it performs worse than simply investing all you got at once.

@Knoch if you can contribute 5’000 CHF now, then do it. You will get more comfortable in the process. Then in 3 months, chip in another 5’000, and so on. If prices are lower than today then good, you can buy cheap. If they are higher, even better, you’re making profit!


#47

Yes, it’s worse. I’ve read that. But investing is very personal. Some people are afraid, some people really believe to know when a crash more or less will happen.
Also “perform worse” might means just 5-6 % difference “only”…


#48

Thanks for the advice, guys.

To come back to the topic if you are interested in learning more about the ideas of Steve Keen (video above) on the supposedly coming financial crisis you can read his small book:

I just finished it and a couple of take-aways are these:

  • crisis is inherent to capitalism and cannot be avoided as the system itself is cyclical
  • crisis happens when private debt goes above 1.5 GDP and keeps accelerating in the last five years
  • China and Hong Kong are among the first candidates that will fall (I read this about China in many places already, including the interviews with Robert Aliber mentioned above), Switzerland is also in the club
  • this crisis may be followed by a long recession, like the case of Japan after 1987
  • the reforms needed to improve the situation would need to be unconventional like “helicopter money” and will meet with strong opposition from the financial sector

#49

Just saw this and I thought it could be of interest:

https://www.bloomberg.com/news/articles/2018-04-05/crash-course-in-market-timing-shows-cost-of-being-wrong-at-tops

Even the worst declines are often erased, meaning an ill-timed decision to sell is usually a bigger mistake than waiting for the bottom. Over the last eight decades, the S&P 500 has advanced a median 21 percent in the year prior to a market top, compared with a 15 percent decline in the year that followed. The gains were big enough to overcome losses over the ensuing year 67 percent of the time, data compiled by BofA show.

Paraphrasing Dr. Strangelove, just stop worrying and learn to love the market. :stuck_out_tongue:


#50

I wonder if not all successful individual active investors have some form of this syndrome - in essence, you need to be ultra unemotional and process numbers fast.


#51

I believe it has more to do with how these investors think about the market.
Buffett makes a good point with an analogy with real estate and farming in his 2013 letter to shareholders (somehow people understand better when we talk about real estate than about the stock market).

It goes like this:
Imagine you own a small farm. This farms yields around 10k USD net every year. You know as well that your earnings will grow little over the long term because of improvement efficiencies (some years it will be a little bit less, some other years a little bit more, but on average it will grow a little bit on the long term).

Now imagine that you have a neighbor that has exactly the same farm as you (this is the analogy with the share where each investor owns the same part of companies).
Imagine as well that your neighbor, this poor fellow, comes every day to your door, and tell you at which price he would buy your farm, or at which price he would sell you his farm, with no obligation on your part.

Most of the time, the price he would quote you would be in line with the 10k the farm is yielding (maybe around 150k-200k USD?). But some other times, your neighbor will suffer from manic-depressive influences and would quote you prices that are totally out of whack.

Would you buy his farm for 1 million USD? Hell no! Would you sell yours for 1 million? Hell yes!
Would you buy his farm for 10k USD? Sure! Would you sell for 10kUSD? Get out of here!

So the cornerstone is to know what you are an owner of, its value and its earning capacity, and also to realize that you have no obligation toward your neighbor, Mr Market. On the contrary, you are totally allowed to take advantage of him during his periods of folly.

If you think like this about the market, then you won’t be affected too much about crashes. Sure, paper losses might hurt a little bit, but as long as you know that what you own is worth way more that the quoted price, then you’ll sleep better.


#52

Today I discovered this economist, who explains very well how the crises are created and why we will have another one:


#53

He wrote pretty good article against central banking:
https://professorwerner.org/shifting-from-central-planning-to-a-decentralised-economy-do-we-need-central-banks/


#54

I read an interesting interview with an economist about the state of the global economy:

http://next.gazeta.pl/next/7,151003,24144057,rozmowy-sroczynskiego-kapitalizm-sie-chwieje-kolejny-kryzys.html

And here the translation from Polish to English:

https://translate.google.ch/translate?sl=pl&tl=en&js=y&prev=_t&hl=en&ie=UTF-8&u=http%3A%2F%2Fnext.gazeta.pl%2Fnext%2F7%2C151003%2C24144057%2Crozmowy-sroczynskiego-kapitalizm-sie-chwieje-kolejny-kryzys.html&edit-text=&act=url

She points to the following reasons why the situation is bad:

  1. less active governments: govt no longer invests in long term R&D and labor unions are less powerful
  2. capital-work imbalance: companies keep more of the added value, less goes to workers
  3. short-sightedness: CEOs are under pressure of instant profit by stock owners
  4. misallocation of resources: as a result of 2&3, companies do not invest long-term in their core business (e.g. build a factory, R&D), but on the financial market (options & futures)
  5. record private debt: the middle class “has to” take loans to maintain their standard of living, we just need a small push to get a snowball effect

She proposes the following steps to fix it:

  1. more active governments: investing in long-term projects, more regulations for banking sector
  2. progressive income tax: tax the rich instead of raising VAT
  3. fight tax havens: global wealth tax, companies should pay taxes where they do business

I like her diagnosis, but I’m not sure I like her solutions. More government, more regulations, more taxes? What is your opinion?


#55

Her solution would cause just more problems long term. Just faster and deeper insolvent state due to demographic pressure.

PS. Lefty intellectuals are “predicting” end of capitalism since Marx, or even earlier. They were wrong for 200 years, there will be wrong for another 200.


#56

Then I invite you to think about the concept that prediction can alter the course of an event. Yuval Noah Harari speaks about that when he write about XIXth century capitalist reading Marx’s theories and adapting to it by authorising unions and worker’s right.

The concept of self cancelating prophecies is fascinating when you think about it :wink:


#57

Except very few exceptions (Singapore for instance), I haven’t seen yet any country where “More government and more taxes” has done any good to society. For this you need a very competent government (very unlikely, an exception like Lee Kuan Yew happens once or twice per century), and politicians with a long term view (impossible when next elections is all that counts for them). As for taxes, they have understood since long that it pays more electorally to promise to tax a minority (often the rich) to the benefit of your target electors.


#58

Maybe they did adapt, or maybe it was just lefty nonsense and capital accumulation increased demand for labor and this in turn improved wages and work conditions - in the West from end of XIX to end of XX century and in China during last 30 years. Just like standard economics explains it.


#59

Speaking of that article, she’s lying about one thing. Inequalities are rising in West, but globally they are shrinking as China and India are catching up economically. And this is related - in the last 30 years more than 1 bilion people moved from countryside to cities to work in factories. This created a sea of direct competition to unqualified and semi-qualified workers in the West, as factories were moving to East. Owners of this factories improved returns as labor costs dropped significantly. The result: West is getting less equal (stagnating Western middle class), but the globe is getting more equal (rise of Asian middle class).

The one thing I liked about this interview is that she admits that the accumulation of global debt is a result of mainstream neoclassical-keynesian economic policies of lowering interest rates (whenever they can), which makes the debt cheaper and thus increases demand for it. It’s basically a reformulation of Mises-Hayek’s argument, but she would never admit it, because they were “neoliberal”.


#60

That’s a great point. I frowned when she said: “the problem is, that it has been accepted, that wage stagnation is an effect of globalisation and automatisation, and you cannot do anything about it”. I don’t know what she would like to do about it: tax robots? put tariffs on China? as you said, western middle class was hurt in the process, but for the World overall these two phenomena are positive.

I’m a bit scared by the overwhelmingly positive comments under that article. People are swallowing this rhetoric too easily. People take too much private debt to buy shit they don’t need, so what do we do? tax the rich!

One argument that does make sense to me though is about market’s short-sightedness. it is true that many technologies in your cellphones were developed in govt programs and that private companies often do not have the patience to experiment for years. This also makes me think: what influence do we, as passive investors, have? Even is Vanguard manages a few percent of the World’s stock market through their passive index funds, do they actually have any say in making decisions in the companies they hold? I guess we’re all these silent passengers who give the money and let them do whatever they want with it.