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This Is What "ALWAYS" Happens Before A Market Crash — Transcript

by Nolan Matthias · 6,883 words · 1,017 segments · language en · Watch on YouTube

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0:00In 1987, during [music] the October
0:02market crash, the Dow fell 22.6% in a
0:05single day. In the year 2000, after the
0:08dotcom peak, the Nasdaq lost roughly 3/4
0:12of its value. Then, from October 2007 to
0:15March 2009, [music]
0:17the S&P 500 fell 57%.
0:20In less than 5 decades, that is three
0:24massive [music] market crashes. For
0:25those of you who haven't lived through
0:26it, imagine watching years of your
0:28retirement savings disappear pretty much
0:30overnight. All while trying to decide if
0:32you should sell, if [music] you should
0:34wait, or if you should buy more. These
0:37three crashes all had different causes,
0:39but they reveal a recurring problem.
0:42Investors [music]
0:43taking risks that they can't afford.
0:45What's crazy is that the warning signs
0:47are often there in [music] plain sight
0:49for everybody to see. In 2007, for
0:52example, stocks reached their peaks 2
0:55months after three major investment
0:57funds had already frozen withdrawals.
1:00[music] They had said to their
1:01investors, "You can't have your money
1:03back until we figure out what's going on
1:05with the economy." That should have been
1:07a sign that the market was already
1:08starting to break. But even when parts
1:10of the economy are already struggling,
1:12when your investments keep rising, it
1:15makes it hard to understand what to
1:17[music] do next. Think of it like the
1:18Jenga tower from the movie The Big
1:20Short. Although in this case, we're
1:22talking about the market in general, not
1:24just mortgage back [music] securities.
1:26The tower, it gets taller as you remove
1:29blocks and add them to the top. The more
1:31blocks you move, the more unstable the
1:34tower gets. Eventually, the tower comes
1:36crashing down. But at the exact same
1:38time that everyone's getting excited
1:39about how high the tower is getting,
1:41you're getting closer and closer [music]
1:43to a crash. And just a second here, cuz
1:46I don't think this tower and the small
1:49size of it
1:51does this justice.
2:00Okay, this one's better. [music] This is
2:02more in line with the magnitude of the
2:04actual problem that we're facing. And
2:06we're going to use this tower to [music]
2:07examine the warning signs behind these
2:09crashes, which ones are visible today,
2:13and how to reduce your exposure so that
2:16if and when the market does crash,
2:18you're prepared. This [music] is what
2:20always happens before a market crash.
2:25Okay, so we all know how this game
2:27works. You take a block from the middle
2:30somewhere and you put it on top. The
2:32tower gets taller even though I removed
2:34something that wasn't holding it up.
2:37This block had very little impact on the
2:40overall stability of the tower because
2:42the other blocks were doing the work. It
2:44potentially had a purpose later on, but
2:46for the most part, this seems like it's
2:48not a big deal, especially at the
2:50beginning of the game. If you had just
2:52walked into the room, you might notice
2:53that there's an extra block on the top
2:55and it's getting taller, but you might
2:57not even notice that one had been pulled
2:59out from the middle. In financial
3:00markets, in the stock market, it can
3:02kind of act the same way. Prices go up,
3:06but the things underneath that were
3:08supporting those prices, they start to
3:10become more vulnerable. On August 9th,
3:122007, a company, a bank in France called
3:16BNP Parabus, and excuse the French
3:19pronunciation, I definitely didn't get
3:21that right. They suspended withdrawals
3:23from three investment funds. The reason
3:26was because of a complete evaporation in
3:29their words of liquidity in the mortgage
3:31back security market. They couldn't make
3:33sense of what was going on and what was
3:35happening. What this meant was that
3:37anybody invested in these three funds
3:39couldn't get their money out. That froze
3:42between 2.2 and 2.7 billion US worth of
3:45funds. It immediately caused a very
3:47short-lived dip in the stock market. And
3:50that same day, as a result, the European
3:52Central Bank had to supply $94.8 8
3:55billion to provide emergency liquidity
3:58to the markets. Yet on October 9th, 2
4:01months later, the S&P 500 reached a new
4:04high. But from that high to March of
4:072009, the index lost 57% of its value.
4:11BNP freezing funds should have been a
4:14warning sign to the entire market, but
4:16it wasn't. It was a sign of what was to
4:19come, but nobody really realized exactly
4:22how big the problem was going to be,
4:24except for a few people that ran big
4:26hedge funds and had been following the
4:28subprime mortgage market. But for
4:29consumers and everyone else, what they
4:32should have heard was that leverage was
4:34becoming a problem because every single
4:36major market crash going back to the
4:38Great Depression always had something to
4:41do with debt and leverage. In this case,
4:44it wasn't necessarily people borrowing
4:46money to buy stocks, but it was mortgage
4:49back securities. And the mortgage back
4:52securities were about to have a massive
4:53effect on the economy by reducing the
4:56amount of available money in the economy
4:58as banks and lenders stopped lending. So
5:01unlike the great depression where
5:02everybody was borrowing money to invest
5:04and then all of a sudden the banks
5:06stopped lending, in this case the banks
5:08were about to stop lending for a
5:10completely different reason. But that
5:11evaporation of liquidity, in other
5:13words, money available to be lent, it is
5:16a consistent theme across market
5:18crashes. And leverage being used to
5:20invest is also a consistent theme across
5:23those crashes. But how could stocks
5:25reach a record after something
5:26underneath the market had already
5:28stopped working? Well, it starts because
5:30a market price of a stock is what buyers
5:33and sellers most recently agreed that it
5:35was worth. It was the price that they
5:38agreed to trade it at. But that price,
5:40it doesn't tell you whether or not the
5:41people who are holding that investment
5:43could survive a serious loss and what
5:46would happen if the value of the stocks
5:48that they own started to go down
5:49significantly. And that's the primary
5:51difference between a correction and a
5:52crash. A correction has a stopping
5:55point, a point where not everybody needs
5:58to sell. But a crash on the other hand,
6:00it's the type of scenario where all the
6:02blocks come falling down. And that's
6:04because a lot of the investors end up
6:06not being able to weather the storm. But
6:08the question is, how do you know if your
6:10investments and you yourself can survive
6:13a correction or a market crash? Well,
6:15the truth is nobody knows for sure. But
6:18there are things you can do in order to
6:20protect yourself. What most people don't
6:21realize is that a market crash or a
6:23correction, it's when great companies go
6:25on sale. You can buy them at a bargain,
6:28just like Warren Buffett does every time
6:30the market seems to crash. The investors
6:32who typically end up doing the best are
6:34the ones that know which companies are
6:36strong enough to survive. and the ones
6:38that are worth buying on the way down.
6:40One of the tools that I use to do this
6:42is investing pro by investing.com.
6:44Investing pro, it's a tool that I
6:46actually use, one that helps me research
6:49the supports under my own investments.
6:51And it helps me decide whether I should
6:52be buying, selling, waiting, or putting
6:55my money elsewhere. And that's exactly
6:57what I use investing pro for. The ideas
7:00section is actually one of my favorites.
7:02It's where I can go in and look at the
7:04portfolios of people like Warren
7:05Buffett, Bill Gates, Ray Dallio, Carl
7:08Ian. You can view how their portfolios
7:10have performed over time. And these are
7:12the actual real holdings that are
7:14derived from the SEC disclosures. And a
7:16little bit later on, I'll come back to
7:18how you can use this to build out your
7:19own portfolio and make sure that you're
7:21removing as much risk as possible. You
7:24can also compare the financial health
7:25and fair value of various different
7:27stocks, and then use Warren AI, which
7:29they just rebuilt, and determine whether
7:31or not there's any lowrisk investments
7:34that are undervalued. And for me, this
7:36saves a ton of time that I used to have
7:37to spend digging through other financial
7:39apps. Of course, losses are still
7:41possible. This is investing after all.
7:43Right now, they're running a flash sale.
7:45It allows you to save 55% off Investing
7:48Pro, which is well worth the money, at
7:50least in my opinion. But if you use my
7:52link in the description below, you'll
7:53get an additional 15% off. The flash
7:56sale, this offer, it lasts for just 48
7:58hours. So check the link in the
8:00description below and in the first pin
8:02comment. And like I said before, I'm
8:04going to circle back to Investing Pro a
8:05little bit later on to show you how you
8:07can check your portfolio for risk and
8:10also check the portfolios of people like
8:11Ray Dalio and Warren Buffett to see what
8:14they're doing. So let's talk about what
8:15holds the market up even when it seems
8:18like it should be falling. If your
8:20investments keep rising, how do you tell
8:22whether you're getting wealthier or
8:24taking on more risk? Before a market
8:27crash, those two things can happen
8:29together. And your account balance, it
8:31won't explain the difference. Yes, it
8:34looks like it's going up, but it doesn't
8:36show you the risk associated with the
8:38prices. Imagine comparing two portfolios
8:40with identical returns, but only one of
8:43the owners can afford to wait through a
8:45downturn. So for both of these
8:47individuals, the gains, they look
8:49identical until something goes wrong and
8:52their choices, the ones that they have
8:54to make become very different. That gap
8:57between a good result and the ability to
9:00survive, it's going to keep recurring
9:01throughout the story. But we need a way
9:03to recognize it before the losses
9:05actually happen. And this tower, it's
9:07going to help us separate what looks
9:09successful from what can withstand a
9:11setback. And we're going to start with
9:13what each block in the tower actually
9:15represents. So a standard Jenga tower,
9:17it has 54 blocks, but this one is
9:19obviously not a standard Jenga tower.
9:21But like I said before, that tower, it's
9:23too small to represent the significance
9:25of what we're actually talking about
9:27here. But regardless of whether we're
9:28using the small tower or the big tower,
9:30the tower's height represents the value
9:32of the market. It also, in another way,
9:35represents the amount of money that's
9:37sitting in a lot of people's retirement
9:38accounts. each of these blocks that
9:40represents something in the financial
9:42system that gives people and the markets
9:45room to absorb a loss. Removing these
9:47protections, removing the blocks at the
9:50bottom that are supporting the top,
9:51that's what creates the environment that
9:53can lead to a significant market crash.
9:55But as the value of investments go up,
9:57the markets at all-time highs, it means
9:59the economy is good. The higher the
10:01prices go, the more people start to
10:04think that it's okay to take risks.
10:06Because if you don't, you might
10:08experience FOMO, the fear of missing
10:10out, and you might miss out on the
10:12gains. And not only is this individual
10:14investors that start taking the risk,
10:16but it's also the government with
10:18respect to the rules that are designed
10:19to protect the people. And every
10:21protection, whether it be by the
10:22government with respect to rules around
10:24investing and company valuations and
10:26things like that, or the rules that
10:28lenders have in order to decide who gets
10:31money, think about the 2008 financial
10:33crisis when mortgage lenders were able
10:35to lend to pretty much everybody. And
10:37the more that they stripped away the
10:39rules with respect to lending, the
10:40riskier everything got. Well, that's
10:43exactly what we're talking about here.
10:45Each protection that's removed is
10:47essentially taking a block and moving it
10:50to the top of the tower. And the
10:52question, which is often hard to answer,
10:55is whether the higher prices reflect
10:57stronger businesses or a greater
10:59willingness for the economy, investors,
11:02and the market to take on risk. And
11:03there's nine levels to this whole thing.
11:05They start with the real economy and go
11:07all the way up to the psychology of the
11:09markets. These are the levels that
11:11organize the financial system. And the
11:13sequence in which they fall is never the
11:15same. But it's almost always several of
11:18these components that cause a correction
11:20that turns into a market crash. So what
11:23supports the money that we invest? And
11:25what happens to your investments when
11:27customers behind those companies start
11:28running out of money? Believe it or not,
11:30a market crash, it can reach your
11:32retirement account through businesses
11:33that were completely unrelated to what
11:36caused the original correction or the
11:38original crash in the first place. Think
11:39about all the companies that lost value
11:41that had nothing to do with mortgages in
11:432008. Imagine owning a company whose
11:46customers still want its products but
11:48can no longer afford to buy them. The
11:50warning signs begin with how people are
11:52paying for the activity that looks
11:54healthy today, is propping up the
11:56market, but is creating more risk. So,
11:59let's start with level one. This is the
12:01real economy. This is you. The real
12:04economy is the work and the production
12:06that supports everything else above it.
12:08Without you, without the real economy,
12:10without the work, without the
12:12production, none of the other stuff
12:14really matters because businesses need
12:16customers who can keep spending in order
12:18to survive. And vice versa, households,
12:21people, they need employers who can keep
12:24paying them. So, this is the foundation
12:26of everything. It's also the thing that
12:29gets hurt the most when everything else
12:31comes crashing down. Now, the problems
12:32here start when the earnings results and
12:35the desire to push more profits
12:38sacrifices the ability to earn money
12:40down the road. A business might cut
12:42equipment maintenance. A household might
12:44use credit cards to maintain spending
12:46after its income falls. And removing a
12:48block from the real economy, which is an
12:50individual's ability to earn and spend,
12:52everything else starts to get a little
12:54bit weaker. So, I'm going to start
12:55actually pulling blocks out of this
12:57tower. And I don't even know if we're
12:59going to get to the end of the
13:00explanation, but we'll see how far we
13:02get.
13:04When financial losses become fewer
13:06customers, lost wages, and reduced
13:08access to credit, that affects the real
13:11economy. But what happens when people
13:13stop trusting their banks? What happens
13:15if everyone decides that they need to
13:17access their money and pull it out of
13:18the bank at exactly the same time?
13:21During a financial panic, your ability
13:22to pay a bill can depend on decisions
13:25made by thousands of strangers. Imagine
13:28doing nothing different than discovering
13:31that the institution that you have your
13:33money deposited at is suddenly under
13:35pressure and everyone's trying to get
13:37their money out. This is something that
13:38has happened before. And this second
13:40level, this is the foundation. This is
13:43the trust in the financial system and
13:46arguably I think it's probably one of
13:47the most important pieces of the
13:48economy. We expect the money that we
13:50deposit into the bank to be available to
13:52be pulled out. We expect payments to
13:55arrive where they should when they
13:56should. And we expect that dollars will
13:59be accepted not only in the US but
14:02realistically pretty much everywhere.
14:04Investors on the other hand they often
14:06depend on government borrowing which is
14:07treasuries and they also depend on the
14:09central banks being able to continue to
14:11function. But banks face a timing
14:13problem between the money that they
14:15receive and the money that they lend
14:17out. A bank might make a loan that has a
14:19term of 5 or 10 years or 30 years in the
14:22case of mortgages. But its depositors,
14:24they expect to be able to withdraw the
14:26money that they deposited, the same
14:28money that's been lent out to other
14:30people immediately. And what happens is
14:32that when enough customers demand cash
14:34at the exact same time, the bank has to
14:37sell off the loans that they had made to
14:38other people in order to get assets
14:41earlier than what they had planned. And
14:43typically, they have to sell these at a
14:45loss. A bank taking losses on its
14:47assets, that can create a whole new wave
14:50of customers trying to get their money
14:51out. Now, at this level, there's all
14:53kinds of supports that are designed to
14:54help us. The requirement for banks to
14:56hold a certain amount of capital, have
14:58deposit insurance, and the emergency
15:00lending that can happen by places like
15:03the Fed that help interrupt the panic.
15:05So, in theory, just having those, you
15:08would feel like you have a pretty strong
15:10foundation. But while these protections
15:12can make it less likely for you to lose
15:14your money, they can't make every
15:16investment loss disappear. And the
15:18support here starts to weaken when
15:19investors start to think that public
15:22assistance is going to protect every
15:23risk that they choose to take. They
15:25might start borrowing more money or
15:27accept higher interest rates because
15:29they expect that somebody else is going
15:30to absorb the consequences. But if you
15:32think back to 2008, a majority of the
15:35rescues had more to do with saving the
15:37companies than they did with the
15:38individuals. At least from the
15:40perspective of the amount of dollars
15:41that were put into companies versus the
15:43amount of dollars that were put into
15:44people. And what's worse is that when
15:46the protections are taken away or under
15:48the circumstances somewhere in the
15:50future where the government doesn't step
15:51in to fix a financial crisis or when
15:53there's just massive political chaos,
15:56this foundation of trust in the dollar's
15:59value and the fact that the money system
16:01will continue to work, it becomes a
16:03piece that's highly unlikely to be
16:05removed, but it still can be removed.
16:08And the more pieces at the bottom that
16:09get removed, the more unstable the
16:11entire market becomes.
16:15Yeah, I know I cheated there a little
16:16bit, but I moved that block to the wrong
16:18spot in the first place. So, next we
16:20need to look at what happens when
16:21borrowing gets more expensive. Level
16:23three is the operating system. This is
16:25things like the inflation rate, interest
16:27rates, trade conditions, and all the
16:30policies behind financial decisions.
16:33People and households, they make
16:34commitments based on the assumptions
16:36about their income, mortgage payments,
16:38and what things are going to cost on a
16:39day-to-day basis. Businesses also make
16:42commitments based on the assumptions
16:43that they're going to have to pay a
16:45certain amount, consume a certain amount
16:47of energy, have a certain amount of
16:49customer demand, and that borrowing
16:50costs are going to be relatively stable.
16:52The interesting part is that the longer
16:54that conditions remain stable and
16:56favorable, the more likely it becomes
16:58that families, businesses, and
16:59individuals are going to make decisions
17:01that leave less and less room to survive
17:05any sort of market crash. The more
17:07things seem like they'll never change,
17:09the more risk people are willing to
17:10take. Imagine a business that pays 4%
17:13interest for a decade. Then all of a
17:15sudden, the debt comes due and it has to
17:17refinance at 8%. All of a sudden, a
17:20significantly higher portion of its
17:22profits are now being spent in order to
17:24pay the interest. And the oil shock of
17:26today, the oil shock of 1973, they show
17:29how quickly these [clears throat]
17:30assumptions can become expensive. For
17:32those who don't remember the Arab oil
17:34embargo, Arab countries put an embargo
17:37on the United States and they also cut
17:39production pushing oil prices
17:42significantly higher. This was not
17:44something that was expected by consumers
17:46and definitely wasn't something that was
17:48expected by businesses. In just a matter
17:50of months, the price of oil had jumped
17:52by almost five times. pretty much every
17:54business in the US faced higher costs
17:56and consumers they also faced those
17:58higher costs and had less money
18:00available to buy the products that the
18:02businesses were making. So when it comes
18:04to investing in the market the question
18:06is how many of your investments depend
18:07on favorable conditions to continue in
18:10order for the value of those investments
18:12to continue to remain high. So most of
18:14the time the operating system, the
18:15interest rates, the inflation rates, the
18:17central banks, they all operate just
18:19fine, but it's those moments where
18:21things change and change quickly where
18:24you have to start taking a block out
18:26from underneath the operating system and
18:28putting it on top. I would think that
18:30right now with inflation rates, higher
18:32interest rates, tariffs, the oil
18:34situation, it's pretty safe to say that
18:37we're in one of those times where part
18:39of the operating system is starting to
18:41break. That block was the first one that
18:43I took and put on top at the beginning
18:45of the video. And then that leads us to
18:46the plumbing, the thing that keeps the
18:48whole thing working because the
18:49plumbing, it's literally how freely
18:51money is able to move throughout the
18:53market. So what happens when the
18:55plumbing breaks? The plumbing is the
18:56network of funding and payments that
18:58keep financial institutions operating
19:00daily. This whole system depends on
19:03lenders continuing to accept collateral
19:06in exchange for providing lending on the
19:08next loan. But uncertainty about an
19:11asset's value can interrupt that
19:13funding. And as loans come up for
19:14renewal, if the value of the assets has
19:16gone down, companies and individuals may
19:19not be able to renew those loans,
19:21causing even greater problems in the
19:23market. A lender might offer a smaller
19:25loan. They might demand more collateral,
19:27more things to be held against it. Or
19:30they might just stop lending altogether.
19:32By the way, I'm working on a video right
19:34now about what Warren Buffett always
19:35does before a market crash. And it's
19:38interesting.
19:39because he is almost always accumulating
19:42cash and holding back investing when
19:45there is an excess amount of money
19:47available to invest. But when the market
19:50crashes and the economy shrinks, that
19:52tends to be when he is armed with a war
19:54chest of cash when nobody else has it
19:56available and he's able to go in and
19:58start buying assets at really cheap
20:00prices. So, if you want a little extra
20:02lesson from this video, the person who's
20:04prepared with cash when cash is no
20:05longer available tends to be the person
20:07who wins in a market crash. And
20:10[clears throat] this brings us back to
20:11the BNP Parabus issue of August of 2007
20:15because what happened was literally
20:17trading in parts of the mortgage back
20:18securities market had become too
20:20difficult to establish the values of
20:23what the investments were worth. This is
20:25why BNP stopped redemptions. it couldn't
20:28reliably figure out what the investments
20:30it was making were actually worth. And
20:33think about [clears throat] it this way,
20:34BNP buying those loans as mortgage back
20:36securities was essentially BNP acting as
20:39the lender. But when they couldn't value
20:42the securities or for that matter what
20:44the future value of those loans would
20:46be, that's when they had to stop because
20:48without a credible value of what
20:51everything was worth, the funds couldn't
20:53actually establish a fair value that
20:55somebody could withdraw at. So in other
20:57words, it's like we have no idea what
20:59it's worth. We have a [clears throat]
21:00value right now, but we know it's not
21:02worth that. If we start letting people
21:05redeem at that price, we're essentially
21:07running a Ponzi scheme where the last
21:09people to redeem are never going to get
21:10any of their money. And this spread to
21:13other lenders, other banks, and that
21:15gave other banks and other financial
21:16institutions more reason to be cautious
21:19about financing related assets. And
21:21that's why the ECB had to step in and
21:23supply that $94.8 8 billion for
21:26liquidity. Believe it or not, they were
21:28injecting money into the economy in
21:30order to protect the foundation, which
21:32was the trust in the system. And
21:35removing this block, which we already
21:37did earlier for some reason, it
21:39represents dependable financing, the
21:42ability for people and companies to get
21:44funding, to get loans. But when that
21:46funding disappears, it may force
21:49investors to sell their investments in
21:51order to cover losses, in order to get
21:54new loans, or in order to just survive
21:57or in a worst case scenario because they
21:58went bankrupt and a trustee is just flat
22:01out liquidating their assets. The
22:03question becomes, how long can an
22:04investor hold something while waiting
22:06for stocks and investments to recover?
22:08And as stocks continue to go down, how
22:11long can they wait before they start
22:12deciding that they need to get out in
22:14order to reduce their exposure to lower
22:17and lower prices? Now, what's
22:18interesting is often the only people
22:20that lose money in a stock market crash
22:22are the people who sell, who lock in the
22:25losses. But the people who can hold on
22:28and then after that continue to buy more
22:29and more and more, they often come out
22:31of it ahead. Then there's the next level
22:34here. This is the balance sheet. This
22:35can be individual, it can be business,
22:37it can be a bank. And the balance sheet
22:40is really simple. What does an
22:42individual, an institution, a bank, a
22:45business owe versus what do they have
22:47for assets? And it also has to do with
22:49what assets can actually be sold quickly
22:52if cash is needed. Because a valuable
22:54house, it doesn't automatically mean
22:56that somebody's going to be able to get
22:57cash in order to pay a bill.
22:59[clears throat] But a stock or liquid
23:00investments, that's a totally different
23:02situation. But the more that people's
23:04assets tend to shift towards illquid
23:06assets, things that can't be sold if
23:09needed, things like a house or things
23:10like investments that have gone down
23:12significantly in value and shift away
23:14from having liquid assets on the balance
23:16sheet, that starts to create more
23:17danger. And the problem certainly
23:19becomes when somebody starts to owe more
23:23than what they have in assets. And not
23:25only that, where their obligations on
23:27what they owe become more than what they
23:29have coming in in income. In fact, two
23:31investors or two businesses, they can
23:33have very similar profits, very similar
23:35incomes, but they can face substantially
23:38different risks depending on how much
23:41one or the other has to repay in debt.
23:43This is why it's so important if you
23:45want to completely derisk yourself from
23:47a market crash or a financial crisis to
23:50have as little debt as possible and
23:52ideally none. And by the way, when it
23:54comes to investing, you can use
23:56Investing Pro in order to determine what
23:58the balance sheet of various different
23:59companies look like as well before you
24:01invest in them. So, this is where it's
24:03starting to get scary because the
24:05balance sheet starts to look a little
24:06bit wonky. We're getting a lot more
24:08unstable when it comes to our tower and
24:11subsequently the market. But here's
24:13where it really starts to get scary.
24:16This is when the trouble really happens
24:17both for individuals, for businesses,
24:19and for the entire economy. This next
24:21level is leverage. both the kind you can
24:24see and the hidden leverage that you
24:26can't. So even though the stock market
24:28may be going up and up and up and it
24:29seems like it's at all-time highs, what
24:32we often can't see is how much
24:34individuals and investors are borrowing
24:36in order to buy those assets. Yes, you
24:39can see what's being bought on margin
24:41and you can see data with respect to
24:42this, but if an individual takes money
24:45out of a home equity line of credit in
24:47order to invest, that doesn't really
24:49show up in the market data. So, we know
24:52that the price of Nvidia and the price
24:54of the Magnificent 7 is going up
24:56substantially, but we don't know if
24:58that's people who have this FOMO and are
25:01borrowing money when they can't afford
25:03to buy the stocks in order to buy the
25:05stocks. And these are the first people
25:07that get hurt when the market starts to
25:09crash. They're also the people who are
25:11forced to sell. And if you go back and
25:13watch one of my previous videos called
25:15the crash that will change a generation,
25:17I talk about exactly this and how young
25:19investors are willing to take more risk
25:21with respect to borrowing money to
25:23invest and using options which are a
25:25little bit more dangerous than normal
25:27investing. And depending on how many of
25:29these investors have piled into the
25:31market to get that yolo ride off of
25:34Nvidia or off of Meta or off of any of
25:37the big tech companies, that could have
25:39a massive impact on a correction in the
25:41stock market turning into a full-out
25:42crash. And this is what happened before
25:44the Great Depression, the Roaring 20s.
25:46Investments were going up in value.
25:48People were borrowing money. They were
25:50getting more and more money back on
25:51their investments. They were borrowing
25:53more. Then all of a sudden the bottom
25:55came out on the market and a lot of
25:57people were left with investments that
25:59were worth virtually nothing and big
26:01loans to repay because they had borrowed
26:03the money to make those investments.
26:05Same thing with the dot bubble. People
26:07were borrowing to get in on this dot
26:10craze and when the market corrected,
26:13they had to sell their investments but
26:15couldn't cover the loans that they had
26:17used in order to buy them. And my fear
26:19here is that this is starting to rhyme
26:20an awful lot like what's happening with
26:22AI investments. So now as we're getting
26:24higher and higher up the levels here,
26:26things continue to get a lot scarier.
26:29The prices and the valuations are
26:31getting higher, but the stability is
26:34going down substantially
26:36to the point where at this point I'm not
26:39even sure that we're going to be able to
26:40get through all the levels before this
26:41tower comes crashing down. And this is
26:44[clears throat] what brings us to the
26:45market structure. This requires that
26:47there are sellers that are willing to
26:48sell and buyers that are willing to buy.
26:50On October 19th of 1987, the Dow Jones
26:54fell 22.6%
26:56in one trading session, one day. One of
26:58the major contributors to this was
27:00portfolio insurance, which attempted to
27:03reduce exposure as the markets fell.
27:05Now, trading problems, other market
27:07stresses, and uncertainty, they also
27:09contributed to this crash. But a
27:12strategy that intended to protect one
27:14investor, it amplified [clears throat]
27:16the selling with everybody else when
27:18everybody else was using it too. So
27:20sometimes the things in the market that
27:21are designed to protect people can end
27:23up causing the problem. The problem with
27:25that is that when the market structure
27:27breaks, [clears throat] which isn't
27:28something that typically happens, but
27:30can, it can cause a correction that
27:33leads to a crash because a whole bunch
27:35of blocks below it have been taken out
27:38previously. And this [clears throat]
27:39becomes especially dangerous when a lot
27:41of people own the same positions and
27:44they all have the exact same reasons to
27:46exit. Maybe things like they borrowed
27:48the money on margin to buy the
27:50investments and now they're getting a
27:51mortgage in call. Then when you consider
27:53things like index funds which are useful
27:57but you have to consider them with
27:58respect to the other holdings that you
28:00have and whether or not there's overlap.
28:02One of the most interesting things that
28:04happened in this last year was SpaceX.
28:06they listed on the NASDAQ because the
28:08NASDAQ changed the rules with respect to
28:10what companies had to be included in the
28:12index funds. All of a sudden, pretty
28:14much overnight, all the major indexes
28:17that followed the S&P and followed the
28:19NASDAQ were forced to include SpaceX,
28:22which at this point in time from a
28:24profitability standpoint and also from
28:26the standpoint of it was the largest IPO
28:29in history and the valuation was
28:32impossible to verify. Well, all these
28:35index funds were required to own the
28:37SpaceX stock, which by the way also led
28:40to the value of SpaceX going up because
28:43all the index funds had to buy it. Now,
28:45when you consider how high the value is
28:47of SpaceX and how much of it each index
28:50fund would have to buy, all of a sudden,
28:52there's something new from the last year
28:54in the market structure that if SpaceX
28:57had a major problem could lead to a lot
28:59of index funds going down a lot more in
29:01value than they could have prior to
29:03SpaceX becoming a publicly traded
29:05company. So you can consider SpaceX and
29:08the way it IPOed and the obligations
29:10with respect to the index funds owning
29:12it of lock being pulled from the market
29:15structure. And then we get into the
29:17eighth level. This is the fraud. This is
29:19the hysteria.
29:21This is when everyone starts talking
29:23about an investment like they're an
29:25investment expert. This is when you get
29:27in the Uber and they start talking to
29:29you about the SpaceX stock or they start
29:32talking to you about investing in Nvidia
29:34because AI is a thing and the value's
29:37gone up substantially. Well, the
29:39question is if your Uber driver is
29:40telling you to invest in Nvidia because
29:42he did, is it still in a place where it
29:44makes sense to invest there or is it now
29:46overvalued? Well, I'll show you in a
29:48second using the tools I talked about
29:49earlier how you can determine at least
29:52to some extent where it's at. But the
29:54hysteria happens when everyone starts
29:56piling into one thing, thinking it is
29:58the best thing ever. In 2006, 2007, it
30:02was real estate. Can only ever go up in
30:04price. You have to own it and you cannot
30:05lose. We all know how that ended. In the
30:08'90s, it was the dot companies. We all
30:11know how that ended. And in the 1920s,
30:13it was this new thing called publicly
30:16traded companies that all of a sudden
30:18everybody had access to. And we all know
30:20how that ended. But when there's
30:21hysteria and everyone starts piling
30:23money into investments because they
30:25think they can't lose and they're also
30:27afraid of missing out, that doesn't
30:29necessarily mean there's going to be a
30:30crash. But it's definitely a sign that
30:32people need to start taking some of
30:34their profits and start protecting
30:36themselves just in case there is a
30:38correction, which could lead to a crash.
30:40So now we start pulling from the
30:43hysteria. And I can't believe at this
30:46point we've gotten this far. And that
30:48leads us to the last block, which is the
30:50psychology.
30:51It's the psychology of the market.
30:54Success always encourages people to take
30:56more risks. For some reason, people
30:59think that once they're a winner, they
31:00will always be a winner and that they
31:02can take more risk because they had
31:03bought Nvidia when it already climbed
31:05pretty significantly
31:07and maybe didn't have much more room to
31:09go up. But this is the winner's curse.
31:11This is when you've won before and you
31:14think that you'll be able to continue to
31:15win again. Maybe because you did
31:17something intelligent, maybe because you
31:18got lucky, but you start to ignore the
31:21risks. And this is where psychology in
31:23the markets really takes over because at
31:25this point, the psychology when it's
31:28positive encourages the market decline.
31:32But it doesn't take much. All it takes
31:34is one company like BNP saying, "We
31:38don't know what's happening. You can't
31:39redeem your investments." and then some
31:41bad earnings reports from places like
31:44Layman Brothers or Bear Sterns for the
31:46psychology to shift pretty much in an
31:48instant. And [clears throat] in today's
31:50day and age when information moves
31:51faster, it shows up on people's phones
31:54instantly. The psychology can change so
31:56fast that you don't even see it happen.
31:58And when that psychology shifts,
32:05it's one of the hardest blocks in the
32:08entire tower to pull. But you can rest
32:11assured that it will be pulled, and
32:14there's virtually no way for this to end
32:17in anything
32:20but collapse. So, let's get rid of our
32:23tower here. The market's crashed and now
32:26let's talk about what you can do about
32:27it [clears throat] to protect yourself.
32:28So, let's talk about building a
32:29crashresistant portfolio.
32:32This reduces the risk of a severe
32:34decline that forces you into making
32:37damaging financial decisions. The first
32:39step in building a crashresistant
32:41portfolio is to make sure you have as
32:43little debt as humanly possible.
32:45Building a portfolio while you owe money
32:47on your credit cards is complete
32:49insanity. Don't do it. Your whole goal
32:52should be to de-risk yourself by having
32:54as little debt as possible and also
32:56giving yourself enough flexibility to
32:59keep making the best decisions based on
33:01what you have and what your needs are.
33:03Then when you do start investing, you
33:05want to use a tool like investing.com
33:08that lets you study the disclosed
33:09portfolios of people who are well-known
33:12investors who know how to invest and
33:14know how to protect themselves. The fact
33:16that Warren Buffett accumulates cash
33:18when cash is widely available should be
33:21a pretty good sign of what an individual
33:23investor should be doing as well. But at
33:25the same time, that doesn't mean being
33:26not invested. It means continuing to
33:29invest, but not investing everything so
33:31that you do have cash on hand in the
33:34event that the market crashes so that
33:36you can use those funds to survive, but
33:38also use those funds to buy when
33:41companies are cheap. And Ray Dalio, he's
33:44famous for having his all-weather
33:45portfolio. But the standard all-weather
33:47portfolio, the way he describes it is
33:49largely based off of owning various
33:50different types of ETFs. If you want to
33:53see what he's actually buying and what
33:55he actually owns, you can take a look
33:57right at his portfolio in Investing Pro,
34:00which true to his word and what he says
34:01he invests in, which is largely ETFs, is
34:04actually a large percentage of what he
34:05actually owns. But he also owns other
34:08companies. And the nice thing about
34:09investing pro is you can take a look at
34:11the other companies that he owns and
34:13determine whether or not there's any
34:15lowrisk investments that are undervalued
34:18that you might be able to add to your
34:20portfolio for diversification. Because
34:22one of the underlying pieces of the all
34:24weather portfolio, which Radalio doesn't
34:26always talk about, but is used in
34:28Bridgewater Capital and his investing
34:30career is having uncorrelated assets.
34:34assets that don't move together and
34:36having 10 to 15 of them that are
34:38completely unrelated. So, you can invest
34:41in ETFs like he does, but also see if
34:43there's any good value stocks that he
34:45also owns that you can use to further
34:48diversify your holdings. Now, what's
34:50really interesting about this is you can
34:52also see that Ray Dalio typically
34:54doesn't own more than 2 to 3% maximum in
34:58individual stocks, unlike Warren
35:00Buffett, who's been buying shares of
35:01certain companies for years and owns as
35:04high as 25 to 26 and at one point up to
35:0640% of his portfolio in single
35:09individual stocks. Then as you start
35:11making selections, you can add them to
35:13the watch list and you can get Warren AI
35:16to go through and review that watch list
35:19for both risk and the potential returns
35:21on your investments. And this is
35:22important because when it comes to this
35:24stuff, you're taking the single most
35:26important step that you can take as an
35:27investor, which is never to put it in
35:30somebody else's hands and take complete
35:33control and responsibility of your own
35:36financial education. And the good news
35:38is in the age of AI, it's become easier
35:41and faster to learn anything you want as
35:43long as you're learning and you're
35:45getting AI to help you [clears throat]
35:46learn and make decisions as opposed to
35:49just letting it make the decisions for
35:51you. So without a doubt, you can build
35:53your own recession resistant portfolio.
35:56And you can learn how to do this thing
35:57called investing in a way that's going
35:59to allow you to break free of those who
36:01get slaughtered during the next market
36:02crash and put you in the group with
36:05those who are prepared and are able to
36:08take advantage of companies going on
36:09sale for in some cases the cheapest
36:12prices they've ever been at. Oh, and if
36:15you want to see more about the market
36:17crash that will change a generation and
36:19how young people are making riskier and
36:21riskier investments, make sure you check
36:23out this video right here.

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