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The day you wanted to sell everything

2020.3.23 Luis Silva

It's hard to be optimistic in these moments when it feels like the world is collapsing, when we're experiencing something we've never seen and never thought we'd see, a worldwide pandemic. But it is with a message of optimism that I want to leave you today.

The past few days there has been a crash in stock markets at unimaginable speed. I don't want to sound like an irresponsibly optimistic person but we have to realize that we can't panic and we have to see things as they really are, not as they seem to us, regardless of whether we think they could get worse (and at the time of writing the markets are back in the Red).

There are several articles on the speed and depth of this latest crash. And we've been sharing some of them on the blog sidebar via links to those articles.

I would like you to look at the chart below and try to understand how I see the market (I use the American S&P500 as a proxy).

Note: The graphics in this article, if viewed on PC, are interactive. You can zoom if you want. Just click and drag the mouse (holding the click)


Yes, this drop has been unusually fast but the truth is that if we look at the drop in terms of "lost time" it is, for now, much lower than a drop like in 2008. Here are two hypothetical purchases: one in August 1996 at 660 points and another at 2300 points in January 2017.

Try to imagine yourself in the position of the person who made the first purchase and see the importance of the longevity of a drawdown (down from the maximum), not just the depth or how much you are losing. I made the "purchases" specifically at times where the initial investment never goes negative. But tell me if, after making purchase 1, and earning more than 100% on two occasions, in March 2009 and after 13 years without earning anything, it's not the day they "wanted to sell everything", even though it is never losing its initial value.

Drawdowns have an impact not only on the depth and/or loss of capital, but also on the timing, which, personally, turns out to be even more important. Even though this fall is the fastest ever, I would prefer to be in the position of who made purchase 2 (at this moment, considering the data we have). I think that those who find themselves in that position are better off than those who spent the 2000s without making money in the stock market (or even won and losing again, twice).

My aim is to make you think differently about takedowns. It's been unusually fast but the truth is that you don't see (yet!?) long-term damage in the stock market. Being the fastest fall ever has brought the disadvantages we all know but on the other hand it can quickly create good long-term opportunities in the near future.

Luis Silva
Luis Silva

With a degree in economics (2006) and a postgraduate degree in Finance from Universidade Católica do Porto (2010), he later realized that he shared the same enthusiasm for programming.

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