Grow Up To 1,000% Richer In The Great Stock Panic Of 2002
Wildest Stock Market Gyrations In 70
Weeks are compressed into days; days into minutes. Market declines (or rallies), which would normally be spread out over time, take place almost instantly ... driving fear and panic into the hearts of investors ... or spurring wild bouts of speculative euphoria.
Everything — the torrid pace of buying and selling, the ups and downs of stock prices, interest rates, even consumer sentiment — is vastly accelerated. Examples:
In 1987, the greatest volume ever traded was only 288 million! And back in the early 1930s, volume on the Dow was as low as a hundred thousand shares a day.
You must not ignore this acceleration of time and transactions. It is potentially the most dangerous phenomenon of our times. Even the brightest, shrewdest, most experienced money managers have fallen victim. Julian Robertson of Tiger Management, forced to close up shop ... while George Soros himself had over $5 billion of investor funds go up in smoke in just one month in 2000.
Why are stocks swinging so wildly? If we saw such huge swings and volume during a bull market, won't we see even larger swings and volume in a panicky bear market? How can you protect your finances and insulate yourself from the dangers? How can you turn the tables on the markets and transform these moves into veritable profit bonanzas?
Market volatility goes wild
Today's markets are the
Look at this chart. The average daily range in the Dow has climbed from a low of 0.6% in 1944 to 4.2% today. That's the wildest swings since 1930 — just before the major decline into the 1932 bottom.
But this is not just another technical indicator. It reflects powerful forces converging into one time and place:
Force #1. Concentration in one sector or even one stock. Instead of diversifying their portfolios, investors loaded up on the latest dot-com, biotech, or e-commerce IPOs, blind to the dangers of investing in a company that sells for over 200, 300, even 1,000 times earnings. In the process, they dumped the shares of thousands of other companies with real value.
Now, with more and more investors crowding into fewer and fewer stocks, any lurch for the exits has a far more devastating impact. That's one of the key reasons technology stocks took such a horrific beating so quickly. It also helps explain why the entire market has been so volatile. And after a major unexpected event, such as we've seen recently, that volatility can be even greater.
Force #2. Electronic brokering and day trading. The growth in online brokerage firms and trading has been nothing short of extraordinary. Problem: It's also attracted a growing number of amateur investors, with no experience in down markets, little or no capital to cushion against losses, and a very quick trigger finger to sell at the drop of a hat.
Discount commissions — or virtually commission-less trades — make all the difference in the world. Years ago, when you had to pay commissions equivalent to several dollars per share to buy a stock, you thought long and hard before making any transactions. Today, it may cost almost nothing, fueling massive in-and-out trading and opening the floodgates to waves of buying and selling at a moment's notice.
Right now, the average share of stock on the NYSE is being bought and sold nearly 8 times per day! That's the highest turnover rate since the crash of '87. And back then, it lasted for only a short period. Now, the high turnover is continuous and far greater when averaged over several months.
Force #3. The huge, dangerous increase in leverage used by average investors. Volatility and speed of change wouldn't be quite so dangerous if it were all based on cash. Throw in big debt — directly from broker loans or indirectly from credit cards and refinanced mortgages — and you can see this market is a time bomb. The reality: America's stock market investors are in debt up to their ears ...
Force #4. Foreign investors could also pull out at almost any time. Right now, there is more foreign capital in the US markets than ever before — an estimated $6.3 trillion. As long as America was viewed as a safe haven in an otherwise dangerous world, foreign investors held on. But that is now in doubt. And foreign investors, uninhibited by concerns of patriotism, are bound to sell in droves.
Force #5. Derivatives. Individual and institutional investors — both in the US and abroad — have placed bets to the tune of $38 TRILLION, using derivatives. These are mostly high-risk side bets on stocks, bonds, currencies — almost any security or commodity under the sun. And they are especially vulnerable to unpredictable sudden events, such as the attacks on America.
The problem is derivatives are poorly understood, and even more poorly regulated — a mega-trillion-dollar casino that can only add more momentum to the decline. (More on derivatives in Chapter 15.)
Put all five forces together — and the picture is clear: A massive debt bubble that has driven investors into the greatest stock market fever of all time.
The only possible outcome: A Great Stock Panic — bouts of panic selling, driving stock prices into the swiftest declines in a half century, with great, unprecedented volatility. However ...
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