17. How to Buy During a Crisis

Why you should stay calm in a panic

IWILL NEVER FORGET what I was doing on the morning of March 22, 2020. It was a Sunday and I was on my way to get groceries from my local Fairway at 30th Street and 2nd Avenue in Manhattan.

Less than 48 hours earlier, the S&P 500 had finished the week down 3.4% and was now 32% off its highs from a month prior. I only remember this because I was struggling to justify to myself how the market could recover with the global economy grinding to a halt as a result of the pandemic.

Indoor dining had been shut down in New York City, the NBA season had been suspended, and the news of canceled weddings had just started to trickle into my inbox. I knew others were panicking as well because I was receiving an increasing amount of worried texts from friends and family:

Is the bottom in?

Should I sell my stocks?

How much worse could it get from here?

To be honest, I had no clue. But I had to find a way of thinking about this crisis to keep myself (and those that had reached out to me) sane.

As I took the escalator down into the atrium of the store, I saw a huge assortment of flowers for sale. The flowers were always there at the base of the escalator, but on this particular Sunday morning I happened to notice that a man was taking his time to arrange them.

This was the moment when I realized that everything was going to be okay. Even as the world was crumbling all around me, somehow, the flower guy was still there trying to sell his flowers.

Something about that moment stuck with me. Maybe it was because of how audacious it seemed. Why would I need flowers at a time like this? I need canned goods and toilet paper.

But it wasn’t audacious. It was a moment of normalcy. If the flower guy still has hope, why shouldn’t I? I never told anyone about this private realization, but it lifted my spirits when I needed it most.

What happened next was a train of thought that allowed me to come up with a new framework for investing amid a financial panic. What follows is that framework, which I hope will change the way you think about buying assets during future market crashes.

I wrote this chapter as a guide for you to refer back to when the financial world looks most uncertain. When the perfect storm hits, as it inevitably will at some point in the future, I want you to return to this chapter and read it again. If you get it right, it will be worth what you paid for this book, many, many times over. May the investment gods have mercy upon your soul.

Why Market Crashes are Buying Opportunities

The 18th century banker Baron Rothschild reportedly said, “The time to buy is when there’s blood in the streets.” Rothschild made a small fortune using this motto in the panic that followed the Battle of Waterloo. But how true is it?

In chapter 14 I did everything in my power to convince you that it would be unwise to hold cash in hopes of buying during a market correction (i.e., when there’s blood in the streets). The infrequency of these events makes hoarding cash unprofitable for most investors most of the time.

However, the data suggests that if you find yourself with investable cash during a market correction, it might be one of the best investment opportunities you will ever get.

The reasoning is simple—every dollar invested during the crash will grow to far more than one invested in months prior, assuming that the market eventually recovers.

To demonstrate this, let’s imagine that you decided to invest $100 every month into U.S. stocks from September 1929 to November 1936. This period covers the 1929 crash and the recovery that followed.

If you were to follow such a strategy, the first chart shows what each $100 monthly payment would have grown to by the time U.S. stocks recovered in November 1936 (including dividends and adjusting for inflation).

As you can see, the closer you bought to the bottom in the summer of 1932, the greater the long-term benefit of that purchase. Every $100 invested at the lows would grow to $440 by November 1936, which is roughly three times greater than the growth of a $100 purchase made in 1930 (which grew to $150 by 1936).

Most market crashes won’t provide such 3x opportunities, but many of them do provide a 50%–100% upside.

Where does this upside come from?

It comes from a simple mathematical fact—every percentage loss requires an even larger percentage gain to get back to even.

Losing 10% requires an 11.11% gain to recover, losing 20% requires a 25% gain to recover, and losing 50% requires a 100% gain (a doubling) to recover. You can see this exponential relationship more clearly in the next chart.

On March 22, 2020, when I had the realization that the world was going to make it through the COVID-19 pandemic, the S&P 500 was down about 33%.

From the previous chart, this implied that the market would have to gain 50% to get back to even. Every dollar invested on March 23, 2020 (the next trading day) would eventually grow to $1.50, assuming the market recovered to its previous level at some point in the future.

Thankfully, the market did recover and in record time. Within six months the S&P 500 was making all-time highs once again. Those who had bought on March 23 had a 50% gain within half a year.

However, even if the recovery had taken years longer, buying on March 23, 2020 would still have been a great decision. All you had to do was to reframe how you thought about the upside.

Reframing the Upside

Despite the seemingly obvious upside to buying on March 23, 2020, many investors were afraid to do so. Unfortunately, the problem seemed to be how they thought about the issue.

For example, if I had asked you on March 22, 2020, “How long do you think it will take for the market to recover from its 33% loss?” what would you have said?

Will it take a month before it hits a new all-time high?

A year?

A decade?

Based on your answer, we can then back out your expected annual return for the market going forward.


Well, we know that a 33% loss requires a 50% gain to get back to even. So, once I know how long you expect the recovery to take, I can turn that 50% upside into an annualized number.

The formula for this is:

Expected Annual Return = (1 + % Gain Needed to Recover)^(1/Number of Years to Recover) – 1

But since we know that the “% Gain Needed to Recover” is 50%, we can plug in this number and simplify this equation to:

Expected Annual Return = (1.5)^(1/Number of Years to Recover) – 1

So, if you think the market recovery will take:

· 1 year, then your expected annual return = 50%

· 2 years, then your expected annual return = 22%

· 3 years, then your expected annual return = 14%

· 4 years, then your expected annual return = 11%

· 5 years, then your expected annual return = 8%

At the time, I thought the market would take one to two years to recover, meaning that every dollar I invested on March 23, 2020 was likely to grow by 22% (or more) annually for that two-year period.

More importantly, even those who expected the market to recover in five years would receive an 8% annual return if they bought on that day. This 8% return is very similar to the long-term average return of U.S. stocks.

This is why buying during this crisis was such a no-brainer. Even in the scenario where the market took half a decade to recover, you would still earn an 8% return while you waited.

This logic can be used during any future market crisis as well. Because if you had bought anytime the market was down by at least 30%, your future annualized returns would usually have been quite good.

The next chart illustrates this. It shows the distribution of your annualized returns if you were to buy during any month when U.S. stocks were down by 30% (or more) from 1920–2020. The returns shown are from when stocks first were down 30% (or more) until their next all-time high.

This chart implies that there is a less than 10% chance that you would have experienced 0%–5% annualized returns (including dividends and adjusting for inflation) when buying while the market was down at least 30%. In fact, more than half the time, your annualized return during the recovery would have exceeded 10% per year. You can see this if you add the 0%–5% bar and the 5%–10% bar together, which totals less than 50%.

But wait, there’s more. If we subset the data to include only those periods where the market was down 50% (or more) from 1920–2020, your future returns would look even more attractive.

As you can see, when U.S. equity markets have gotten cut in half, the future annualized returns usually exceed 25%. This implies that when the market is down by 50%, it’s time to back up the truck and invest as much as you can afford.

Of course, you may not have a lot of investable cash to take advantage of these rare occurrences when the market is in turmoil, because of wider economic uncertainty. However, if you do have the cash to spare then the data suggests that it would be wise to take advantage of this buying opportunity.

What About Markets That Don’t Recover Quickly?

The analysis in this chapter has assumed that equity markets recover within a few years to a decade from a major crash. And while this is true most of the time, there have been notable exceptions.

For example, the Japanese stock market was still below its December 1989 highs over 30 years later at the end of 2020, as shown in the next chart.

Anytime I discuss the importance of long-term investing, Japan is the primary counter example.

But there are others too. For example, at the end of 2020, Russian stocks were down 50% and Greek stocks were down 98% from their 2008 highs. Will these markets ever recover? I have no idea.

However, we shouldn’t let the exceptions overwrite the rule—most equity markets go up most of the time.

Yes, there will be occasional periods of poor performance over longer time periods. After all, even U.S. stocks had their lost decade from 2000–2010.

But how likely is it that an equity market will lose money over a multi-decade time frame?

After analyzing developed equity market returns across 39 countries from 1841 to 2019, researchers estimated that the probability of losing relative to inflation over a 30-year investment horizon was 12%.93

This means that there is roughly a 1 in 8 chance that you could expect an investor in a particular equity market to see a loss of purchasing power over three decades. The Japanese stock market is one example of this.

However, as frightening as this may seem, this research gives me more confidence in global equity markets, not less. Because it implies that there is a 7 in 8 chance that an equity market will grow its purchasing power over the long run. I like those odds.

More importantly though, the researchers’ estimates are based on a single investment into an equity market, not periodic purchases. For example, if you invested all of your cash at the Japanese market peak in 1989, you would have been underwater on that investment 30 years later. But how often do individual investors make these kinds of one-off big financial decisions? Almost never.

Most people are buying income-producing assets over time, not just once. If you control for these periodic purchases instead of using single investments, then the probability of losing money over multiple decades is smaller.

For example, if you had invested $1 into the Japanese stock market on every trading day from 1980 until the end of 2020, your portfolio would still have earned you a slightly positive return over that 40-year period.

As the next chart illustrates, there were some periods over these four decades where your portfolio value exceeded your cost basis (how much you put in) and there were some periods where it didn’t.

Anytime the market value (black line) is above the cost basis (gray line), this means that you had earned a positive return on your money. And anytime the market value is below the cost basis, you had earned a negative return on your money.

As you can see, by the end of 2020, the total return over this 40-year period was slightly positive. Not a great result, but also not bad considering Japan had one of the worst stock market performances on earth over the last 30 years.

Ultimately, the example of Japan illustrates that while you can lose money in some equity markets over multiple decades, the chances are lower if you are investing your money over time (as most individual investors are).

Nevertheless, some people will use Japan and other examples as an excuse to sit in cash until the dust settles during the next crisis. However, by the time the dust has settled, the market is typically already on its path upward.

Those timid souls who were too afraid to jump in end up getting left behind. I saw this happen with my own eyes in March 2020 and I am quite confident that I will see it again in the future.

If you are still too scared to buy during a crisis, I don’t blame you though. It’s easy to find examples throughout history where doing so would have been foolish in hindsight. But we can’t invest based on exceptions or what might happen. Otherwise, we would never invest at all.

As Friedrich Neitzsche once said, “Ignore the past and you will lose an eye. Live in the past and you will lose both.”

Knowing history is important, but obsessing over it can lead us astray. This is why we must invest based on what the data tells us. Jeremy Siegel, the famed financial author, summarized it best when he wrote:

“Fear has a greater grasp on human action than does the impressive weight of historical evidence.”

It’s my favorite investing quote of all time and the only one fitting enough to end this chapter. I can only hope that it provides you with the mental fortitude to just keep buying the next time there’s blood in the streets.

Now that we have spent time reviewing how to buy assets, even during the darkest of times, we turn out attention to an even more difficult question—when should you sell?

93 Anarkulova, Aizhan, Scott Cederburg, and Michael S. O'Doherty, “Stocks for the Long Run? Evidence from a Broad Sample of Developed Markets,” ssrn.com (May 6, 2020).

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