Levels of Losing in the Stock Market

Bill Simmons wrote a piece for ESPN back in the day called The 13 Levels of Losing when it comes to life as a die-hard sports fanatic.

I thought about this column recently as it pertains to the markets.

The worst was ‘That Game’ which refers to something like the 1986 World Series where the ball went through Buckner’s legs on a grounder.1

‘That Game’ is reserved for something unfathomable like the Great Depression. An 85% or so crash is so mind-numbing I can’t even imagine what that was like. I still don’t understand how the system survived that period.

The second-worst level on Simmons’s list was ‘The Stomach Punch.’ This was reserved for buzzer-beaters, inopportune fumbles or improbable last-second victories.

The 1987 crash was a stomach punch loss in the stock market.

This past Thursday’s 9.5% loss in the S&P 500, which was the worst one day decline since that 1987 crash, was as well. In fact, this entire bear market is a stomach punch considering it’s the fastest bear market from an all-time high in history.

I picture most investors felt like a boxer who’d been pulverized for 10 rounds wobbling back to their chair in the corner of the ring, completely out of gas and the will to go on.2

I suppose it would have been easy to throw in the towel after that stomach punch but a funny thing happened the next day — stocks rose 9.3%.

This is what happens when stocks are in a downtrend. Stomach punches are thrown in both directions so bulls and bears alike a kept off guard. Volatility picks up in both directions, making every investor, no matter their current stance, feel like an idiot for a time.

Just look at the daily S&P 500 returns from last week:

  • Monday -7.6%
  • Tuesday +4.9%
  • Wednesday -4.9%
  • Thursday -9.5%
  • Friday +9.3%

Even after Friday’s enormous snapback rally, the S&P still finished the week down 8.8%.

With such wide swings from day-to-day, I’m sure it’s tempting for many investors to make big moves in their portfolio, either completely selling out or going all-in depending on the mood.

What if I could time just one of these big moves perfectly? I’d be set for the rest of the year!

On the other hand, let’s assume you were the worst day-trader in the world last week and decided to panic-sell everything following the bloodbath on Monday, buy back in after Tuesday’s rally, hold through Wednesday’s loss and finally capitulating yet again by selling after Thursday’s stomach punch, thus missing the massive gains on Friday.

Instead of being down “only” 8.8% along with the market, your account would be down more than 20%. Missing out on just two big up days takes you from a very bad week to a personal bear market in no time.

An unrealistic situation?

Sure, yet this example shows why capitulation can be so painful in such volatile markets. It’s always impossible to guess what’s coming next in the markets but seeing such wild moves can make it tempting to try.

And it doesn’t matter if you’re bullish, bearish, or unsure-ish at the moment. When markets have no memory from day-to-day, investors begin seeing patterns where none exist.

The problem with false-pattern recognition is once you think you’ve got the market figured out and it zigs when you think it’s going to zag that’s when overreactions create poor decisions and you’re stuck.

The S&P 500 is currently down 20.5% from all-time highs last seen on February 19th, less than a month ago. That’s a bear market in just 17 trading sessions.

Those 17 trading sessions include seven losses of 3% or more, including four in excess of 4%. There have also been four daily gains of 4% or more. That means 65% of this ridiculously fast bear market has been daily moves of 4% or more in either direction.

When the market is as volatile as it is at the moment there’s no predicting what will happen next.

Thursday’s stomach punch loss is never easy to sit through as an investor. However, stomach punch losses immediately turn into the game level of losing when you sell just before a huge rally or vice versa.

Living through a bear market is hard enough as it is.

The levels of losing only go up if you make it worse by buying or selling at the wrong time.

Further Reading:
The One Guarantee in the Stock Market

1My personal ‘The Game’ is when Michigan lost to Michigan State on that crazy blocked-punt-returned-for-a-touchdown-as-time-expired play a few years ago. I still can’t watch the replay to this day.

2Credit to me for not using that Mike Tyson quote here.

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