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So what does a stock market crash actually look like that is what we are going to be discussing in today’s video i want to start off by sharing a quote from john templeton it is very valuable in understanding what actually causes a stock market crash he says that bull markets are born on pessimism grown on skepticism mature on optimism and die on euphoria later
On in this video we’re gonna go over the stages of a bull market we’re gonna draw it out on my whiteboard but i want to plant that seed in your head to get you to start thinking about what happens when a bull market actually comes to a close the truth is everyone likes to talk about the upside the market has the potential gains the potential returns but very few
People like to actually talk about the potential downside risk as well or what happens when you make a bad investment or invest in the market at a terrible time stop i’m not telling you guys not to invest in the stock market all i’m telling you to do is use common sense honestly that’s what it comes down to at the end of the day common sense will keep you out of
Trouble when you invest in the stock market so i’ve been getting a lot of emails from people lately asking about bear markets asking about whether or not i think the stock market is going to crash anytime soon and one thing you’ll learn once you’ve been investing for a long time is that timing the market is pretty much impossible you might be right once in a while
But you’re gonna be wrong a lot of the time as well and so as far as when the next market crash will occur your guess is as good as mine well bear markets are a very normal thing they’re a very healthy part of the market and it’s something we have to deal with once in a while and there are countless examples of bear markets or market crashes that have occurred in
The past we have tulip mania back in the 1600s there was the wall street crash of 1929 black monday in 1987 and in this video we’re gonna be talking about the dot-com bubble that formed in the early 2000s we had the financial crisis of 2008 and most recently we have this cryptocurrency sell-off that has occurred so what do all of these market crashes have in common
What they have in common is that a speculative bubble had formed and a speculative bubble forms when an asset is trading at a price that highly exceeds the intrinsic or underlying value so in this video we’re going to be using yahoo as an example to show you what it actually looks like when a stock trading in a speculative bubble and what it means when a stock is
Trading at a price that exceeds the intrinsic value and i know i’m using a lot of complicated financial lingo here but i promise you we’re gonna keep it very simple using a lemonade stand as an example but we are going to analyze the dot-com bubble of the early 2000s to better understand what causes a bubble or a speculative bubble to form and what a market crash
Actually looks like so back in 1994 these two college students decided to create a searchable index of websites and later on this became yahoo now a few years later this company went public and the general public like you and i could invest in shares of yahoo stock now during the dot-com bubble the stocks of technology companies and primarily those involved with
The internet absolutely exploded in yahoo was no exception to that now do keep in mind that the actual value a company has is determined by the market or what you or i would be willing to pay for one share of that stock it’s all based on supply and demand or the fear and greed the market has and when a bubble is forming people are being very greedy and the price
Keeps on climbing so at one point in time at the peak of the dot-com bubble yahoo stock was trading at an earnings multiple or price to earnings ratio of over 1,000 now i know that’s a term you might not be familiar with so we’re gonna jump over to my board here and do an example of this looking at a lemonade stand as promised earlier so let’s go ahead and assume
This is you right here this is your lemonade stand and you’re selling glasses of ice-cold lemonade for $1 and it’s a summer business and you’re able to make $1,000 of earnings every single year that you operate this lemonade stand but now you decided you’re gonna go off to college and you don’t want to be running a lemonade stand anymore so you say i’m gonna sell
The business so let’s say you have two offers on the table for your lemonade stand okay we know that the earnings potential from this lemonade stand is 1,000 dollars per year and all for number one is for ten thousand dollars so this investor is willing to pay $10,000 for something that is earning $1,000 per year and if that lemonade stand continued to generate
One thousand dollars per year of earnings he would have his investment back in just ten years that right there is a reasonable investment that would be a pe or price to earnings ratio of 10 now this is what happened with yahoo stock that would be like somebody coming in and offering you 1 million dollars for a lemonade stand generating 1000 dollars of earnings
Per year so it would take you 1,000 years to get your money back if that lemonade stand is generating 1000 dollars per year that is exactly what happened with yahoo stock people were paying 1000 times the earnings potential of that company at that point in time it is no different than paying a million dollars for a lemonade stand that’s generating one thousand
Dollars per year of earnings now yes yahoo is a technology company and they were involved with a cutting-edge service being offered so it’s a little bit different than lemonade but the pricing example here is no different so to answer the question of what a stock market crash actually looks like let’s go ahead and talk about what happened to yahoo stock after this
Speculative bubble burst so if you were looking to buy shares of yahoo stock back on january 3rd of 2000 you would have paid the all-time high for the stock of 1 1875 per share and on september 26th of 2001 yahoo stock bottomed out at four dollars and five cents per share so if you were the unfortunate soul who bought yahoo stock at the very top and then sold it at
The very bottom you would have sustained a ninety six point six percent loss but let’s go ahead and put that into numbers let’s say you invested ten thousand dollars in yahoo stock at the very peak and sold at the bottom you would have $340 left of that $10,000 that right there is what a stock market crash can look like it can be very painful it can be a 90 plus
Percent loss but i want to bring it back to that lemonade stand example these were people willing to pay a million dollars for a lemonade stand generating one thousand dollars per year of earnings it just didn’t make financial sense and there was no way that price was sustainable for any long period of time and this right here is what a bubble looks like it starts
Off with enthusiasm on the left and then this turns into pure greed we see the first sell-off and then they enter a stage of denial where they think they are buying the dip but really there is much more to lose at that point fear sets in and that price falls in some cases below where it even started when despair sets in and after this point you typically begin to
See a healthy appreciation of that asset so now that we know what a stock market crash looks like and what a speculative bubble is i want to give you guys five tips to avoid getting caught up in such a situation as many people did with yahoo stock back in the early 2000s number one is very simple that is to avoid following the herd if everyone out there is buying
A particular stock or particular asset do not buy that asset it is likely trading on a speculative basis or it will be very shortly and you don’t want to be involved in that my second piece of advice to you is to learn how to value a company by conducting fundamental stock analysis now that’s more than i can teach you guys in this video and i actually have a full
10-part course on fundamental stock analysis which is part of my membership site stock radar and you might be interested in checking that out if you’re looking to learn more about how to value a company but by conducting fundamental stock analysis and beginning to understand the underlying value of an asset or a stock you can determine whether or not that stock
Is overvalued fairly valued or undervalued and you will avoid getting caught up in a trap like people did with yahoo stock and then my third piece of advice is simply to buy low i’m sure we’ve heard the words of warren buffett before buy low and sell high and people who are investing in stocks or assets that are trading in a speculative basis or forming a bubble
Or buying assets at all-time highs i would never recommend buying a stock or any asset when it’s approaching or reaching an all-time high as a value investor i buy low and i sell high and i’m greedy when others are fearful that is what you want to do to be a successful investor number four is very simple as well and it’s a rule you may want to follow and that is
To only invest in profitable companies if a company is not turning a profit it is probably not investment worthy and it’s likely trading on a speculative basis and it’s a stock you may wish to avoid and then fifth and finally my last tip for you is to remember the lemonade stand example and think about whether or not it makes sense to pay a million dollars for a
Lemonade stand generating one thousand dollars worth of earnings and you can use that analogy anytime you’re looking at the p/e or price to earnings ratio of a company anyways guys that’s going to wrap up this video thank you so much for watching if you have a friend or family member who might enjoy this video as well please do not forget to pass it and share it
With somebody else now if you’re new to my channel and this is the first time you’re seeing my face make sure you do subscribe hit that bell for notifications and drop a like on this video if you enjoyed and i just want to make sure this lesson really sunk in with you as the viewer so make sure you comment down below and in your own words describe what a speculative
Bubble is but thank you guys so much for watching and i hope to see you in the next video if you are interested in learning more about investing in the stock market i’ve created a free course just for you the link is in the description below here are a few other videos you might enjoy as well
Transcribed from video
WHAT A STOCK MARKET CRASH LOOKS LIKE 🔥 By Ryan Scribner
