Don’t waste a second stock market crash! I’d get rich from it

There will most probably be a second stock market crash. What can stop us from getting rich from it? Anna Sokolidou tries to find out.

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A second stock market crash is coming, I think. I wouldn’t recommend anyone to waste it. Instead, we should do all we can to get rich from it. 

Reasons for the second stock market crash

There are plenty of reasons to expect a second market crash, indeed. To start with, there’s the coronavirus pandemic, which is far from over. The Covid-19 situation in the UK and the US is really complicated. I think it will take quite a while to contain the pandemic.

But the economic consequences will most probably take even longer to resolve. By this I mean the problems of the resulting unemployment and low consumer demand. Tensions between the US and China also pose a risk to investor sentiment. The US elections contribute even more to the overall uncertainty.

These problems will, in my view, lead to another stock market crash. But we should not waste it!

Here are some of the most common reasons why people don’t manage to profit from crashes. 

Psychological reasons for not taking advantage

My colleague Stepan Lavrouk gave some very good reasons for investors failing to get rich. One is simply the lack of ability to choose companies. Many people behave like children in a candy shop. They like too many stocks but fail to choose a few. There’s also the inability to stick to their shares for a long time. One of the reasons why Warren Buffett, the Sage of Omaha, is such a successful investor is because he likes to hold his winning stocks for years if not decades. In other words, time is the best friend of ‘good’ holdings and an enemy of ‘low-quality possessions’. 

Daniel Kahneman

But there’s another big reason for failing to succeed. Daniel Kahneman, a great psychologist, explained why some people don’t take advantage of a stock market crash. Kahneman says that human beings like to get either overoptimistic about their investments or too pessimistic. So, when prices rise and get too high, they like to buy. At the same time, when prices fall and there are in fact plenty of bargains, they like to panic-sell their shares. Just because the price of an asset has fallen, it might in fact seem to be riskier than it used to. Likewise, if the price of a stock has risen, it might seem to be a much safer investment. But in fact the opposite is true! That’s why many people cannot get rich from a stock market crash.

Some people are also prone to biases. They like to judge the current situation according to the most vivid examples they know. For example, after the Great Depression was over, many analysts said that shares were nothing but speculative instruments because the memory of the crash was too vivid. But in fact many companies were really great value for money at the time because they were cheap. Some investors don’t like to buy anything after a stock market crash has already happened. That’s often because a friend of theirs lost plenty of money during the great recession of 2008–09.       

After having read about some of the most common biases, I am sure you won’t waste another stock market crash. 

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Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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