I don't buy every dip, but I ALWAYS buy every CRASH!

Speculation in Play #331 | May 5-9, 2025

What is a Stock Market Crash?

A stock market crash is a sudden, sharp decline in stock prices, often more severe than a regular dip. Over the past 150 years, there have been about 19 crashes, roughly once a decade, according to historical data. These events are typically triggered by macroeconomic factors like recessions or geopolitical tensions, rather than company-specific issues.

Why Buy During Crashes?

Buying during crashes can be advantageous because it allows investors to purchase high-quality stocks at reduced prices. For example, during the 2008 financial crisis, the S&P 500 dropped 51%, but by 2013, it had recovered and reached new highs. Similarly, the COVID-19 crash in March 2020 saw a 19.6% decline, recovering in just four months. This suggests that crashes, often driven by market sentiment rather than company fundamentals, create opportunities for long-term gains.

Risks and Considerations

However, there are risks. Not all stocks recover, and some crashes, like the Nikkei 225 in 1990, took over 13 years to bottom out, with full recovery taking even longer. Investors must focus on companies with strong fundamentals, such as those in defensive sectors like consumer staples, utilities, and healthcare, which tend to perform better during downturns.

Practical Advice

I maintain a long-term perspective and avoid panic selling. I always buy in stages by buying stocks at key potential levels of support. For those who would prefer not to do technical analysis, consider dollar-cost averaging—investing fixed amounts regularly—to mitigate timing risks. I always focus on high-quality stocks of companies with narratives I believe in for the long term - a time horizon of at least 10 years.

---

Why ”Buying the Dip” isn’t the same as “Buying the Crash.”

In the realm of investing, retail investors are often criticized for their strategies, particularly for the tendency to "buy every dip." However, a deeper analysis reveals that while not every dip warrants buying, stock market crashes present unique opportunities for long-term wealth creation. This survey note explores the importance of buying during crashes, drawing on historical data, strategic insights, and practical advice, while addressing the stigma faced by retail investors and the associated risks.

Defining Stock Market Crashes

A stock market crash is characterized by a sudden and sharp decline in stock prices, typically more severe than a regular market correction or dip. Historical analysis from Morningstar: What We’ve Learned from 150 Years of Stock Market Crashes indicates there have been 19 such crashes over the past 150 years, occurring approximately once a decade. These events are often triggered by macroeconomic factors, such as recessions, geopolitical tensions, or economic policy shifts, rather than issues specific to individual companies. For instance, the recent April 2025 crash was linked to global tariffs, causing a significant drop in the Dow and S&P 500, highlighting external pressures as a common cause.

Key characteristics of crashes include:

• Heavy selling volume with little demand for buying.

• Interventions like trading halts or government bailouts, reflecting the severity of the downturn.

• Rapid declines, sometimes within days or weeks, as seen in the October 1987 crash, where stocks plunged 23% in a single day before recovering over the next year.

Historical Context and Recovery Patterns

Historical data underscores the market's resilience. This Morningstar analysis reveals that despite the pain of crashes, the market always recovers and reaches new highs. For example:

• The Great Depression (1929) saw a 79% drop, taking over four years to recover, as detailed in the Morningstar data.

• The dot-com bust (2000-2002) and the Great Recession (2008) combined into a "Lost Decade," with a 54% decline, recovering by May 2013, a period of over 12 years.

• The COVID-19 pandemic in March 2020 resulted in a 19.6% decline, but the market recovered in just four months, the fastest recovery in 150 years.

A notable example is the December 2021 downturn, spurred by the Russia-Ukraine war, inflation, and supply shortages, which took 18 months to recover, ranking 11th in pain index severity. This variability in recovery times—from months to over a decade—highlights the unpredictability, yet the consistent eventual recovery supports the case for buying during crashes.

The long-term growth is evident: a $1 investment in 1871 grew to $28,916 by January 2025 in real terms, demonstrating the power of staying invested despite crashes.

The Case for Buying During Crashes

The rationale for buying during crashes is rooted in the opportunity to acquire high-quality stocks at undervalued prices, particularly when the downturn is driven by macro factors rather than company-specific issues. To me a crash offers bargain-basement pricing on top-performing stocks. For instance:

• During the 2008 financial crisis, the S&P 500 dropped 51%, but by 2013, it had not only recovered but exceeded pre-crash levels, rewarding those who bought at the lows.

• The COVID-19 crash saw major indexes lose over 30% in 2020, but within a year, they surpassed pre-crash levels, illustrating rapid recovery potential.

While many investors make the legitimate case for defensive stocks, such as those in consumer staples, utilities, and healthcare, I prefer to focus on companies whose stocks I own (or have wanted to own) but haven’t been able to buy or add to because I have felt prices were too rich. When the market sells everything off, these stocks go on sale and let me in at the prices I wish I could have gotten them on the way up.

The philosophy of buying during crashes is echoed by legendary investors like Warren Buffett, who advised, "Be fearful when others are greedy, and greedy when others are fearful," a sentiment captured in various financial discussions, reinforcing the contrarian approach.

Addressing Retail Investor Criticism

Retail investors, often derided by professionals, are frequently criticized for buying dips indiscriminately. However, the strategy of buying during crashes, when executed with care, can be valid. I’ve been at this 1998 - nearly 27 years now - and I get rolled into the “retail investor” crowd since I am not a “professional.

My experiences span major events like the dot-com bust, the 2008 crisis, and the 2020 COVID crash, supports this view. Despite the stigma, retail investors can benefit by focusing on long-term gains, as historical recoveries suggest.

While buying during crashes can be rewarding, it’s not without risks. The Nikkei 225 example from 1990, where a 25% drop was followed by a further 41% decline, took 13 years to bottom out, and full recovery took even longer. This illustrates that not all stocks recover, especially if they have underlying issues. Individual companies may go bankrupt, and market timing can be challenging, as recovery periods vary widely, from four months (COVID-19) to over 12 years creating a “lost decade.”

Of course, I must always point out that a “lost decade” is only lost if the investor put all their money in at the top and stopped investing over the time. From 2001-2012, an investor who was dollar-cost-averaging would have made an absolute fortune in gains by the time the market returned to its past all-time highs.

Practical Strategies for Investors

For retail investors, the key is to adopt a disciplined, long-term approach. Here are detailed strategies:

• Focus on High-Quality Stocks: Prioritize companies with strong fundamentals, such as consistent earnings, low debt, and a history of weathering downturns.

• Buy in Stages or Practice Dollar-Cost Averaging: Invest fixed amounts regularly to reduce the impact of volatility, buying more shares when prices are low.

• Avoid Panic Selling: Selling during a crash locks in losses. Holding or buying more can be more rewarding for long-term investors.

• Diversify Your Portfolio: Spread investments across sectors, asset classes, and even geographic areas. I try to have some exposure to all elements of the markets. If there is an area I care for less than others, I will simply allocate less of my portfolio to that area, but I will never ostracize a sector or geographic region entirely as no one has any idea what may outperform in the future.

• Consider Dividend-Paying Stocks: These provide steady income, enhancing returns during recovery. I don’t focus entirely on buying dividend stocks, but it will make a factor in how much I like a stock. There are plenty of excellent growth stocks that pay dividends like Apple (AAPL), Alphabet (GOOGL), Logitech (LOGI), Microsoft (MSFT), Salesforce (CRM), and many more.

Additionally, tax-loss harvesting can be used to offset losses in taxable accounts, selling losing positions and not repurchasing for at least 31 days to avoid the wash sale rule, as detailed in the Investopedia strategies article. Consulting a financial advisor is advisable for those unsure, especially during volatile periods.

Conclusion

Buying during stock market crashes is a strategy that can significantly benefit long-term investors, particularly retail investors often criticized for their approaches. Historical data shows that crashes, driven by macro factors, create opportunities to buy high-quality stocks at undervalued prices, with sectors like consumer staples, utilities, and healthcare offering stability.

While risks exist, such as prolonged recoveries and company-specific failures, a disciplined approach focusing on fundamentals and diversification can turn fear into opportunity. As of May 7, 2025, with recent events like the 2025 crash still unfolding, the evidence leans toward the value of this strategy for those with patience and a long-term outlook.

---

Premium Members:

Read on to discover the week’s biggest winner and loser in the Speculation in Play portfolio as well as all the moves I made this week in addition to my future buying and selling price targets for the positions that saw changes over the week.

---