“When’s the next share market crash” is a common inquiry in the financial advice industry from just about every client with even a passing interest in the stock exchange. Unfortunately, it is a question no one can really give a definitive answer too. Wouldn’t you love to be able to accurately predict share prices?

Maybe, with the tremendous amounts of information produced on a daily basis, an astute student of share markets may have gleaned enough to confidently predict a future calamity. Or maybe a computer wizard has created an algorithm devoted to exact market predictions.

But no matter how much faith you may have in the method, it is hard enough to predict rain next weekend, let alone a major financial crisis triggering a fall in share prices.

Apart from geopolitical shocks or the major issues Mother Nature brings, I tend to favour watching crowd behaviour to provide a signal. Nothing sums this up better than the following saying reputedly coined by JP Morgan during the 1920’s

”When my shoeshine boy is telling me about the stocks he owns it’s time to get out of the market.”

For me, this describes classic crowd behaviour incredibly succinctly. Markets continually move through phases from boom to bust and back again. With the volume of investors participating the key reason for driving these phases.

Booms are synonymous with a large participation of investors. And a lot of them have not been properly educated about share investment. Theirs is the desire for profits. And they certainly enjoy the ease of making money that only a share market boom provides. And as word of success spreads, more and more join in. In boom times, share prices are propelled by just the merest hint of positive news. And will often increase their value with just the expectation of same.

So it is when you detect a heap of these types of investors (shoeshiners, cab drivers, salespeople, retail workers etc) the signs are quite clear of what to expect next. It is time to approach markets cautiously, take some profits and create an appropriate cash buffer. This will not only shield your port- folio to some degree but more importantly, it will provide some ammunition in order to take advantage of what will be some great opportunities.

But currently, I am not seeing it. Economic data suggests people are having a hard time holding onto their money, let alone investing it. So it is difficult to perceive a boom anytime soon. And also means no big crash either.

But before you suddenly breathe a sigh of relief, we also face market corrections which are a bit different. These are a regular occurrence happening on all share markets. Selling to turn paper profit into cash is a normal event, but it can also start the ball rolling for a 5–10% fall.

Couple this with some geopolitical tension and you suddenly have the right recipe for some big downward movements. Unpleasant as they are, these are certainly not share-market crashes ‘per se’ and markets usually recover themselves within a few weeks to a few months. (But there are no rules with investing, so recovery depends on the events causing the uncertainty)

On the positive side, you will often hear this type of correction referred to as a buying opportunity. Again, making these events a great time to add particular shares to your portfolio at a better price. So keep your eye out and your finger on the pulse. And always keep the famous Warren Buffett quote in mind

‘Be fearful when others are greedy, and greedy when others are fearful’

Thanks for reading and I will look forward to seeing you next time. Homepage