Veteran and newbie alike, no one is spared during a market crash. Well, not unless you have a stop loss and have the discipline to execute on it. If you’re someone who just came across the world of trading or investing, you may be asking yourself “What did I just sign up for?” That’s a good question, but what you need to understand is that the market always goes through these cycles. To keep it simple; the market goes through both good and bad times, it just so happens we’re in BAD times as of now.
What’s worse is in the Philippine stock market, you can only make money when prices go HIGHER. However, given the current market conditions, prices of most stocks are sinking faster as the days go by. This is unlike in global markets where you can make money while the price of the asset goes down, this is called SHORTING but will not be part of this article.
So you may be wondering, “What now?” “Is it the end of the stock market as we know it?” That’s another good question! For the benefit of the newbies out there, this is not the first or even the second time a market crash happened. There have been several crashes that have happened outside our lifetime, but the most recent one is the 2008 financial crisis.
Now the most important thing we need to know now is not when the bottom will happen, but rather what to do while waiting for the bottom to appear. In trading, you will never be able to call tops or bottoms. You may be able to do it a couple of times, but never on a consistent basis over a long period of time. However, you still need to be in sync with the market to spot potential opportunities once the reversal does come.
As Warren Buffet said, “Be fearful when others are greedy, be greedy when others are fearful.” But as we wait for the best time to get back in the market, what do we do now?
WHAT TO DO DURING A MARKET CRASH
1. CONTINUOUS LEARNING
There’s never a bad time to increase your knowledge, but now it is probably one of the better times to put even more effort into it. Instead of forcing trades while the market crashes, why not just take this time to find ways to improve your overall trading? Instead of forcefully trying to find low probability setups, it’s much better to use this time to sharpen your axe.
Your continuous learning process during this bear market can be in any form. You can consume quality content through books, online articles, videos, podcasts, and the like. Always remember, there is no one right way of learning. Everyone learns in their own ways, so find yours and go all-in! (Wag po all-in sa isang stock dedo po tayo diyan)
2. STAY IN CASH IN A MARKET CRASH
Again, in the Philippine stock market, we can only make money if prices go up. So the last thing you want to be in this dangerous market environment is fully invested. The best thing to do right now is to be patient and be at least 80% to 90% in cash. This also applies to those who trade global markets. Even if you can make money shorting assets during the crash you will need to remember that the volatility during crashes is on a whole other level.
Some people might think that staying in cash isn’t the best option since it’s basically like keeping your money in the bank with no interest. The whole reason you got into the stock market is to make your money work for you right? There’s a valid point in that argument, but what everyone needs to understand is cash is also a POSITION. Just because you’re not holding any stocks doesn’t mean you’re not doing anything.
Think about the cheetah, probably one of the fastest predators on the planet, doesn’t go for the kill unless the conditions are absolutely in its favor. So as we wait for the market to bottom, you will need to have the patience to deploy your capital once the odds are finally in your favor.
3. FOCUS ON THE OUTLIERS
Yes, it’s best to stay in cash during market downturns. However, that doesn’t mean there aren’t any opportunities at all. There will be a few stocks that may reverse much earlier than the general index, but note that it requires high-level precision to catch these plays. Also, the reason why you don’t want to totally not look at the market during deep corrections is that you want to keep an eye on the potential market leaders once the market bottoms out.
This is one of the most important lessons Mark Minervini, one of the best investors of our lifetime, shared in one of his bestselling books. The market leaders in the next bull market will be those who bottom out BEFORE the general index. Even better, those who are making NEW HIGHS or breaking out of consolidations while the index continues on its downturn. So once you see these characteristics in a stock, keep a close eye on it.
To those feeling disheartened by the difficulties in today’s market, do not give up. All of the best traders of all time went through these periods. If you lost a ton of money during this market downturn, you’re not alone. However, what matters most is how you bounce back from your losses. Even market wizards have gone through points in their trading journey when they got wiped out. What will define you as a trader will be how to persevere during the difficult times in the cycle, not the good times.
Godspeed, mga ka-Investa!