10. Stock Market Crash and Market Bubbles Video Lecture | Become an Expert: Value Investing - Business Basics

welcome to course 1 unit 3 lesson 2
stock market crashes and market bubbles
in this lesson we have three lesson
objectives the first is an introduction
to fear and greed cycles the second is
understanding Warren Buffett's opinion
on market psychology and the third is
understanding the accumulation of shares
versus trading assets so let's get
started I want everyone to imagine that
they're standing on a city street and
they're just kind of minding their own
business looking around when all of a
sudden they see a rampage of people just
start running down the street directly
towards them you have very little time
to react but you just see this mass
group of people running directly towards
you how would you react to that scenario
or that situation as most people think
and contemplate that question I'm sure
that you would probably turn in the same
direction as the crowd of people and
start running with them it's not that
you had to ask them why they were
running or where they were running or
what they are running from your natural
instinct your human instinct is to turn
with the people and start running you
might not know why you not you don't
even have to ask why but your instinct
is telling you that you need to get
moving and you don't want to continue
standing there so as we look at this
scenario let's say you're in a car and
you drove past a nightclub and you're
looking for a place to go out for the
night and you drive past the this
nightclub which is called best nightclub
on the planet and as you drive by you
see a long line of people standing there
and they're all waiting to get in so
what would be your natural inclination
on where you should go that night in
which nightclub you should choose and so
a lot of people would see the long line
and think wow this nightclub has to be
awesome it has to be one of the best
places I could go tonight so they get in
the long line and they wait to get in so
what we're talking about here are human
instincts in the first scenario we were
just describing something that was
fearful in that you were standing on a
street and a mob of people come running
at you and so your instinct is that you
need to turn and run and get out of
there because something bad is about to
happen and the second one you saw a
group of people all standing in line
waiting for some
that has to be good that only reason
people would be waiting in a long line
like that is because something has to be
good on the inside and so you're willing
to see what that is and you're following
that crowds tendency though to wait in
the line so what we're talking about our
instincts and an instinct is described
as any behavior is instinctive if it is
performed without being based upon prior
experience or knowledge and the two
words that I highlighted the area that I
underlined were without and knowledge
and I really want you to remember those
two words as we go through this lesson
so I gave two examples of everyday
occurrences that people could really
quickly relate to and understand and
that's what a lot of people forget about
whenever they understand how markets
move in the short term when I mean short
term I'm just meaning a couple years so
three or four years I consider that
short term I consider like 25 to 30
years long term so when we're talking
about how the markets move in the
short-term you got to understand the
fear and greed cycles and in our
scenario we were talking about people
running down the street that's obviously
our fear cycle and then the greed would
be you waiting in the club to get in
there and and meet fancy people and to
have a great time so when we talked in
the last lesson about mr. market we
understood that mr. market is that
person that would be giving you those
clues to be an instinct based trader so
since most investors based their
investing on emotions and instinct they
follow the mindset of mr. market and
remember instinct is without knowledge
so the solution to this is that we've
got to become knowledgeable we got to
base our decisions on facts opposed to
emotions so as we look at this picture
you can see when mr. markets up they're
yelling hey everybody come on in the I'm
making money you can make money and my
neighbor can make money that's your
greed cycle the mindset during the green
cycle is that a quick buck can be made
and that it's going to take very little
effort on your part in order to make
some money and so what you have is you
have traders who get in for one day and
they make 10% on a stock and they
quickly sell it and they think oh I'm
going to throw it into another one and
they
make some more money on that next thing
you know they're there day trading and
they're doing this consistently day in
and day out and they're they're making
some money doing it and then what
happens is the market corrects because
you have value-based traders who
actually know what the value of those
assets are and they start trading them
down because they're they're too high
and then what comes is the fear cycle
because people start getting scared
because they're losing small amounts of
money and then they're losing larger
amounts of money the next thing you know
they lose an enormous sum of money and
most people get very scared and then the
mindset shifts from making a quick buck
to I don't know the value of these
stocks and I don't really know what I'm
doing so I'm out of here and what they
do is they sell all their shares and
they lick their wounds and they realize
that the little bit of money that they
did make they probably lost it or maybe
even worse they lost more than where
they started out so how do we know what
the stocks are worth is the tough
question and that's what we're really
going to learn in course - but I think
we can all agree that the knowledge of a
stocks value allows an investor to
determine if mr. market is greedy or
fearful if we know what that stocks
worth well then we know if the price is
overvalued or the price is undervalued
and that's really the important thing
here is that we have to know what the
stocks value is and so Warren Buffett's
opinion on this market psychology he
says the key is to be greedy when others
are fearful and to be fearful when
others are greedy so the name of the
game is really accumulating shares
versus trading shares and you want to be
the person who's accumulating shares a
Benjamin Graham who was Warren Buffett's
professor at Columbia he has a wonderful
quote where he says the stock market
behaves like a voting machine but in the
long term it acts like a weighing
machine and what do you meant by this is
in the short term anyone can price a
stock anyone can say it's worth $10 $15
or whatever but in the long term the
stock is going to be worth what its
value is and that's where you look at
the scale there the value becomes
absolute so what I'm going to do is I'm
going to show you two different traders
I'm going to show you a value based
approach and I'm going to show you an
emotional based approach our value
trader is Amy
and Trevor's are you know typical trader
who might not really understand all the
different financial terms and everything
that there is about stocks so I'm going
to go through how the the mindset of
both of these traders works so we have a
me on the top and she's looking at
buying a stock and a company called
American Eagle which is like a clothing
store and just so you know that these
numbers that I'm quoting in this example
aren't real stock numbers from American
Eagle I'm just kind of using it as an
example so Amy would look at American
Eagle and she would read through all the
different financial data and then she
would look at it and say the company's
earnings are two dollars a share and the
$18 a book value is a great margin of
safety the one percent dividend is okay
overall I think its intrinsic value is
probably about twenty two dollars a
share so that's how she would look at it
now your emotional beast trader like
Trevor he would think wow I really like
the company American Eagle I have tons
of their clothes
they've got stores in every mall every
kid in high school shops there they just
opened a new store in the next town over
I'm going to buy some stock in that
company and so that's how Trevor thinks
so what we have is Amy buys 100 shares
of American Eagle for $20 a share so
that's a $2,000 investment for Amy in
buying American Eagle and Trevor does
the same Trevor buys a hundred shares
for $20 each and so he makes a two
thousand dollar investment both in the
same company so for whatever reason we
don't even have to understand what
reason but the market drops and it could
be based off of psychology it could be
based off of any number of things but
that's absolutely impossible to predict
whether the markets going to go up or
down it's just not something you can
predict and so in this scenario the
market goes down okay and it drops the
the shares are not trading for $20 now
they're trading for 15 dollars okay so
this is how Amy would look at that
scenario this is awesome although the
company had a little less earnings than
I hoped for which is probably the reason
it was trading for less it's still worth
at least $20 a share since its trading
for 15 I better get some more wallets at
a good price
so
he's looking at this as oh wow so they
have a little less in their last
quarters earnings that they reported but
the company's still worth $20 which is a
little bit less than what she thought it
was worth before and since is trading
for 15 she's going to even buy more of
it because she knows it's a great deal
now Trevor this is how Trevor would
think oh no what in the world did I get
myself into I just lost five hundred
dollars American Eagle is a great
company how could it go down so much I
might need to sell this I could lose
everything if it goes lower okay so
there's your two different mindsets so
let's go ahead and look at how they
react to that so Amy invests another two
thousand dollars and this time instead
of just getting a hundred shares she
gets a hundred and thirty-three shares
because the market price is cheaper so
now she owns 233 shares of the company
now we look at Trevor and he he's just
going to hold on to his hundred shares
he's a little nervous because he lost
quite a bit of money so let's just say
like another six months go by and that
the stock is still trading down that 15
dollar range so Amy's mindset is I can't
believe people were still trading this
company for $15 she's getting a little
bit frustrated it's now worth $21 a
share based on the new earnings and
balance sheet I'll buy even more shares
another 133 shares are bought for $2000
and now Amy owns 366 shares so Amy
although the stock is still lower than
what she thinks it's worth which is a
little frustrating for a value investor
and I'll tell you there sometimes you
wait for companies for a year two years
before they actually come back to that
intrinsic value that that you might
think that it's worth but the key here
is to think for yourself and to
absolutely know that you're calculating
the value properly and that you're
looking at all the variables right and
so Amy buy some more shares for $15 and
Trevor still nervous he cannot believe
that those shares have gone down so much
and so he's going to continue to hold it
hasn't gone lower so he's not going to
sell but he's going to hold what he
asked so let's say that you know it's
another three to six months or so and
then the market price comes back up to
$24
here which is only four dollars higher
than where they both started Amy says ah
man this thing is trading for more than
what I think it's worth better start
looking somewhere else for a goodbye
because this is overvalued she thinks
it's still worth twenty to twenty two
dollars and it's trading for twenty four
so she stops buying it at this point
she's invested six thousand dollars and
so then her profit because the stock is
back up to twenty four dollars she's
made two thousand seven hundred eighty
four dollars which is a forty six
percent gain now the mindset of Trevor
is sweet I knew this was a great pig
just made some easy money I think I'm
going to buy some more so he's going to
buy some more at the $24 price because
he made some money he made four hundred
dollars in profit on his two thousand
dollar investment and so this is how
this is truly the difference between a
value-based investor and a person who's
really looking at the financial data
versus somebody who's making theirs
their decisions completely based off of
emotions and you can see you know the
saying always says buy low sell high and
when you looked at these two scenarios
Trevor was always buying when it was
high but amy was always buying was when
it was low and whenever that price did
get higher than what she thought it was
worth she immediately stopped buying it
she just held she held those shares and
if you're buying a dividend share which
I strongly recommend in the second
course you're then going to collect the
dividends on that as you just continue
to hold it so something to think about
as you look at how you invest versus how
other people were investing so what kind
of trader are you do you typically sound
like Trevor or do you sound like Amy and
that's something that you're going to
have to decide for yourself and you're
also going to have to decide whether you
think that that's the right approach for
you maybe it's not and here's the here's
the question I really want you two to
think about in the long term who do you
think is ultimately determining the the
market price do you think Amy's the
person who's really controlling the
market price or do you think it's Trevor
and so I would obviously argue that in
the short term Trevor is controlling
that market price because he's making it
goal the Trevor's of the world are
making that thing go up and down because
they're trading on emotion and they're
following mr. market but in the long
term amy is the person who's ultimately
controlling the value that come
so if you'd like the trade shares like
Amy that requires knowledge not instinct
and if you're if you're looking for how
to do that you've come definitely to the
right site we got tons of tutorials here
to help you learn how to be a
knowledgeable investor in a value based
investor and course to is going to teach
you all those things you need to know
for calculating the intrinsic value so
that concludes course 1 unit 3 lesson 2
stock market crashes and market bubbles
and this lesson we had three lesson
objectives which were an introduction to
fear and greed cycles Warren Buffett's
opinion on market psychology and the
difference between accumulating shares
and trading assets and thanks for
joining us and we'll see you in course 1
unit 3 lesson 3