The Crash is Here, Everything You Need to Know to Finally Benefit From It

The Financial Markets Around the World are Turning Red, Don’t Panic.

Recently everyone has been pretty busy predicting the next financial crash.

It looks like it’s here.

Just in time with the newest round of lockdowns around the world, the stock markets turn red again.

The Dow Jones Industrial Average dropped over 750 points as COVID-19 concerns continued to influence markets — Breaking the News / VP

Does it sound familiar to you?

Have you missed the recent rally?

Rest assured most of us have.

In fact, I don’t know anyone who correctly forecasted the fastest asset price recovery in history.

The reason for this run is probably the enormous intervention of the central banks.

The freshly printed cash is nesting themselves into financial assets like stocks, bonds, and securities.

As a result, we see Apple valued with a P/E — Ratio of 36, which is worth more than the whole FTSE 1000 combined. Is Apple a growth stock and justifies this valuation? Certainly not!

We also witnessed TESLA being valued at $450 billion. That’s more than GM, Volkswagen, Toyota, Ford, and most of the other car companies combined.

I know, Tesla is not a usual car company.

Don’t get me wrong, I love the company and I would bet it will be valued at at least $1 trillion in 2030.

But the company is still the same as last year when a share has cost $300.

Today, on a pre-split price Tesla’s share is valued at more than $2,000!

However, the crash is maybe here. Let’s take a look at a typical investor cycle.:

“If you can’t control your emotions, you can’t control your money” — Warren Buffett.

Let’s step back and take a deep breath.

“You have to shift your mind from ‘being right’ to ask‘ when do I know I am right ?‘ ” — Ray Dalio

Did one of the statements in the picture look familiar to you? I’ve often thought that way.

Ray Dalio’s formula to deal with situations like this is the following :

Pain + Reflection = Progress

When investing in stocks, two emotions are particularly relevant:

Excessive fear and euphoria. Both are problematic because they lead to behavior in which the mind fails.

As a result, one behaves impulsively and regrets his behavior later on.

A good comparison is an emotional behavior when you argue with your partner. You might say words that you will regret later.

Here is what you should do instead:

1. Create a List of Companies That You Truly Understand And Feel Comfortable With.

Don’t invest in a stock because others tell you to do.

A helpful concept is the Circle of Competence.

It’s a very simple but powerful and useful concept.

It basically says, If you buy a company without understanding it completely, then there is an extremely high chance of making a costly mistake.

“Intelligent investing is not complex, though that is far from saying that it is easy. What an investor need is the ability to correctly evaluate selected businesses. Note that word “selected”: You don’t have to be an expert on every company or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.” — Warren Buffett

2. Make a Checklist for Each of Those Companies.

Define a target, say 3 hours of research on each of the companies, and do the stock valuation.

Do your research before you buy a stock, don’t follow emotions! They don’t belong to your financial decision-making process.

I have recently shared my research guide.

I know without examples it is difficult to understand a concept. That’s why I wrote another article in which I do the research for you on the example of the eBay stock.

“No wise pilot, no matter how great his talent and experience, fails to use a checklist” — Charlie Munger

3. Only Invest With a Margin of Safety.

This is a classical value-approach and is used by Warren Buffet.

Calculate the value of the stock you want to buy and compare it to the stock price quoted.

If the stock is trading at a fair discount to its value, you can go ahead and buy.

I recommend setting automatic buy orders. Sometimes stocks only fall short.

Otherwise, you’d probably miss it.

Step away from the stock. Don’t follow the price development anymore.

And keep in mind:

In the long run, the share price will always follow the value of the company.

Stick to your plan.

Disclaimer: This article is not investment advice, but for analysis and informational purposes only. It should not be considered Financial Advice. Consult a financial professional before making any significant financial decisions.

I hope to see you again in the future.