Motley Fool Australia

Ready for the “80% stock market crash”?

man with hands on head looking at chart with red downward arrow, stock market crash
Image source: Getty Images

I received a question from one of our members the other day.

It went something like:

“We stuck in there when markets fell. We’ve ridden the partial recovery. But everyone is saying the markets are going to crash hard next. When do we sell?”

I saw another headline the other day, from someone predicting an 80% stock market crash.

Frankly, because I’m greedy, I’d welcome such a crash. I mean the chance to buy a small part of Australia’s best businesses, at 20c on the dollar, because of a short-term market overreaction?

Sign me up.

And while I’m at it, I’ll be mortgaging the house, selling the cars and hocking the TV to raise as much cash as I can.

Not everyone has the same response, however.

An 80% fall would see many people sell in a fit of panic. The desperation to do something – anything – to make the pain stop would be too great.

It’s a strange quirk of human nature: When shares go up, there must be a crash around the corner. But when they fall, things are going to keep getting worse.

Man, talk about seeing the bad side of everything.

I mean, what are the odds that the ASX, currently at 6,000 points, would be not worth buying at 5,000, 4,000 or 3,000 points?

Do you really think Woolworths Group Ltd (ASX: WOW), BHP Group Ltd (ASX: BHP), CSL Limited (ASX: CSL) and Telstra Corporation Ltd (ASX: TLS), which investors happily hold at current prices, are worth holding today, but should be mindlessly sold if their prices halved?

And if they fell 80%?

I hope, dear Fool, that you’d be filling your boots.

Oh, sure. I get it.

We’d all like to sell at the very top, then buy in again at the very bottom.

I’d also like to believe in the Tooth Fairy, Santa Claus, and that Donald Trump actually understands the graphs he used in his interview this week.

Instead, though, we’re stuck in this messy, imprecise reality.

The one that, sans crystal balls, doesn’t give up its secrets – especially about the future.

So let’s break it down.

First, people have been predicting 80% falls for decades.

Yes, decades. 

Often the same people. Sometimes different ones, but with the same schtick.

So far, they’ve all been wrong. Oh, and in the meantime, the stock market is up about 18-fold over the past thirty years.

That’s a helluva gain to miss out on while you waited for the ‘predictions’ to come true, huh?

Second, 80% falls are, well, exceedingly rare. 

Third, if everyone knew the market was going to fall 80%, they’d have already sold.

Now, it’s possible that only you and I know the market is going to fall, because we’re possessed of some special insight. That only the three of us – you, me and the bloke (it’s always a bloke) who made the forecast – know the truth.

Which is as it may be… but that means not everyone knows, after all.

Fourth, your brain is messing with you. So is mine. We hear, see and read the one prediction of doom, compared to the dozens and dozens of people who expect something between a tough ride and prosperity, and which one sticks in our minds? Yep, that one guy.

The one nagging thought, snagged somewhere at the front of our consciousness while the others float by, unremarked upon.

“What if he’s right,” you think. “I mean, it’s possible.”

So ask yourself: Did you think “What if he’s right?” after someone else predicted a swift recovery? Or a prolonged period of stagnation, then recovery?

Probably not. We don’t tend to hang on to those thoughts. It’s the predictions of doom that preoccupy us.

And it’s not your fault.

It’s evolution.

Our brains just aren’t programmed to think that far ahead. 

Or to think in compound, exponential terms.

Confronted with decades of compound growth (including many periods of tough times), we don’t think “What if that continues?”, but rather “What if it ends?”.

And fair enough.

You won’t get any blame from me.

But what I will do is invite you to engage the part of our brain that can critically analyse our instinctive responses.

We instinctively fear the dark, even though we know there’s nothing there.

We instinctively jump at loud noises, even though we know the cause is almost certainly benign.

We instinctively mistrust people who are unlike us, even though we know it’s an evolutionary leftover.

And yes, we instinctively fear market falls, even though we know the overwhelming story of the past century (and more) is that, despite the occasional fall, stock markets tend to go higher.

(And if your response to that is “Yeah, but what about…?”, I’ll tell you that I understand that response, but you’re likely grabbing for the exception that proves the rule, not something that renders the rule useless.)

For what it’s worth, I think an 80% fall is remarkably unlikely.

But far more importantly, it it happens, either one of two things will be true:

The economy has permanently collapsed, and your dollars will be as useless as your shares (and gold, and bitcoin); or

It’s a short term overreaction, which either presents a buying opportunity, or is just a tough time to live through, while you wait for sanity to return.

(And remember, you shouldn’t be investing any money you need in the next 3-5 years, anyway.)

If Woolies falls 80%, do you really think the company will be serving 80% fewer Australians or making 80% less profit from here until eternity?

Do you think CSL sells 80% fewer vaccines and blood products, forever?

Does ResMed Inc (ASX: RMD) lose 80% of its sleep apnoea market?

Will Telstra be only one-fifth of its current size, permanently?

Now, ‘predictions’ of an 80% fall make for great headlines. They get tongues wagging, and people worrying.

Remember last year’s ‘prediction’ of a 50% fall in house prices?

Or 2016’s forecast of an 80% fall in the share market (sounds familiar, huh?).

Every single prediction of a cataclysmic market crash since 1932 has been wrong.

Every. Single. One.

No, I can’t rule it out. Unlike those people who make their outlandish predictions, I make no silly promises.

Is it possible? Yep.

But there are plenty of things that are far more likely that we simply outright ignore in our daily lives, because they’re neither so stark, so seemingly dangerous or so breathlessly reported.

If I declared myself a weatherman, and told you there was a flash flood coming, you’d want to see both my credentials and my track record, right?

I’d suggest treating those predictions with the same disdain.

Fool on!

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Scott Phillips owns shares of Telstra Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia owns shares of Woolworths Limited. The Motley Fool Australia has recommended ResMed Inc. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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