The lessons of financial crises.

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The year 2021 turned out to be very difficult for the global economy. Some say it is a harbinger of a financial crisis, similar to that of the early twentieth century. Let's look at previous financial collapses, analyze their causes and consider whether it is possible to protect ourselves against them.

The Great Depression of 1929.

It has gone down in history, like a crisis with the enormous scale of poverty to which it has led. Economists are divided on its causes. Nevertheless, it is possible to speak with a certain amount of caution about the circumstances that led to it.

The twenties of the United States put the country mad financially rift. It divided the country into social classes, where simple farmers and workers earned very little. They did not have the opportunity to enjoy the fruits of prosperity. In this situation, production capacity has increased more than consumption capacity. The amount of goods exceeded the number of people who could afford them.

The upper classes had such easy access to money that almost everyone went to the stock market to become a speculator. Interestingly, it was the stock market that became a symbol of the collapse of the USA of the thirties. Retail investors have contributed to the huge bubble. When it broke, Wall Street shook in its foundations. Due to the rapid and panicked sales, the largest financial crash in history took place.

The Great Recession of 2008.

More than 70 years have passed since the Great Depression. In 2008, another financial crisis broke out, which many consider to be the worst economic disaster since the crash of the first half of the twentieth century. The Great Recession caused housing prices to fall below 1929 levels. Two years after its completion, unemployment in the US was over 9%.

About two years before the outbreak of the recession, housing prices began to fall for the first time in many decades. People in the market were happy with this news, claiming that the time is finally coming for the overvalued prices to return to the right level. However, the mistake of analysts was not to take into account the situation of the mortgage market, where probably everyone could get money. Often, amounts exceeding the value of the property were borrowed.

Two of the many U.S. laws deregulated derivatives so that banks could invest in their real estate-related group. Investment returns meant that financial institutions granted loans even with a huge risk of non-repayment. This activity was facilitated by the fact that corrupt credit rating agencies gave the highest marks to such loans. At that time, securities with mortgage collateral were held by almost all major institutions on the market, as well as hedge, investment and pension funds.

Bankers realized the scale of the problem around 2007, admitting that the accumulating losses would be difficult to cover. Hence, lending was discontinued. Although the Fed's Federal Reserve Board sought to regulate the situation with the help of providing liquidity in the form of forward stocks, this did not lead to the expected results.

Lessons from the recent financial crisis.

The collapse of economic systems is a complex process and it is difficult to identify specific reasons for this. Is it possible to avoid such a state in the future? It's hard to say. The ordinary citizen will say that crises result from the thoughtlessness and greed of financial institutions. An in-depth analysis may indicate problems in the construction of the monetary system.

In 1999, the deregulation of the derivatives market allowed banks to be relieved of liability and gave them a monopoly over the control of money.

What to do to protect yourself from the next crash?

More and more people terrified by the coronavirus pandemic are asking themselves how to protect themselves from the next crisis. The current economic slowdown has brought to light many of the shortcomings of the system in which we operate. It is true that some finances can be secured through stock market investments, but a reliable way is to buy gold. There is a high probability that gold will become more expensive in the next few years. However, no matter what the future holds for us, gold will always be seen as a hedge, and the profit from it will be rather an addition. The most important function of investment gold is to protect funds from inflation.

What does the story of the Big Bear of Wall Street have to tell us?

Jesse Livermore amassed $100 million in wealth at the height of his career. Converting it into today's value of money, it can equal 1.5 billion. This impressive sum is quite impressive, especially since Livermore was the son of a poor farmer.

When Livermore worked as a helper at brokerage houses at the age of fourteen, he was interested in the stock prices of listed companies and tried to find regularities in their movements. The lack of capital did not allow him to trade, hence young Jesse decided to invest in Bucket Shops, which are something like bookmakers and binary options brokers. They accepted bets of little value, which was enough to help a small amount of money to enter the world of Wall Street.

What can you learn from Jesse Livermore?

The first rule is to buy rising stocks and sell them that are losing value. Trading should only be conducted when the market shows a clear trend. Among many people, this is a matter of course, however, some traders open a position against the trend, thinking that it will suddenly turn around. The assumption that an instrument is too cheap or too expensive for the current trend to continue is completely irrational.

The second rule is that a stock is never too expensive to buy or too cheap to open a short position. Interestingly, there are simple strategies that use the possibility of inverting. They are based on RSI technical indicators. Their value on the financial market is scattered, although it gradually accumulates in many, including those distant places.

This is the reason why reversing a trend based on a technical indicator is unlikely to have the expected effect.

The market is often understood as a single Gaussian distribution. In practice, it consists of many distributions and the fact of overestimating or underestimating the price does not mean anything great. You will get the most profit from entries that allow you to earn from the very beginning.

What if you invest in stocks of listed companies?

Consider such a story. You open a long position on one of the shares of listed companies. You think that at this point the market is in an accumulation phase, ending with a big breakout. What is your surprise when the movement does not occur, and the position has stalled, somewhere near zero.

The passage of a few hours or days has caused the expected increase. However, take into account that the circumstances in the market have changed to such an extent that the arguments for concluding the transaction are completely unreliable.

When the price executes a take profitorder, you can enjoy a profit. Just remember that you were just lucky. You opened the wrong position and thanks to your luck it was successful.

Are Livermor's principles a simple path to success?

Unfortunately, no rules bring 100% profits. Many of the investors have people who change the system in the first band of failures. And yet they could appear in any of the strategies. If a trader changes his strategy until he reaches only a streak of profits, he will fall into a vicious circle. It will change them indefinitely.

Playing on the stock market is not proving your point, but earning money. If in most cases you are right, it basically means nothing, because there may be a profitable investor even when most of his decisions are wrong.

The stock market is primarily about independent thinking.

The stock market activities that brought Livermor fame were associated with the great crisis of the twenties in the USA. The times when probably every player on the stock market was counting on an eternal bull market were illusory, and Livemore predicted a great economic collapse. The prevailing trend in the market did not seem to be suitable for opening short positions. Still, he opened it up and made a fortune in times of poverty.

Understand that the game on the stock market is about making decisions on your own. Herd thinking is nothing more than getting into trouble. If there is hurricane optimism or attentiveness in the market, because maybe there is an opportunity to conclude a transaction opposite to the opinion of the general public.

There is no one ideal way to trade.

The environment of people selling investment rates on the stock market surprisingly denies everything that contradicts their methods. It is true that there are tools that have no right to work, and the level of their complexity makes them useless. Still, many unrelated sources contain very useful tips. If your information starts to complement each other instead of excluding, then you are going in a very good direction.

None of this information will be worthless, and as you assimilate it, you will have a better understanding of the market. There is no point in denying something in which someone has not found value. There is no one-size-fits-all way of trade.

There are also no secret systems or leaks from Wall Street. In fact, there is hard work on analyzing your mistakes. If you understand the laws of the market, learn how to manage your budget and eliminate emotionally motivated trading.

No one knows what the future prices will be?

Some believe that even on Wall Street itself, investors don't know what they're doing, and prices fluctuate randomly. However, this is far too much of a simplification of the subject.

A paradoxical facilitation for you may be the fact that highly liquid financial markets are often manipulated. If a large hedge fund is opening its positions, it is certainly not going to close them at a loss.

This may mean for you the opportunity to conclude trades in harmony with their flow. In principle, a good way to do daily trading is to recognize the momentum in the market and use it according to your own goals.

Hard work pays off, but not always.

Approach this topic with common sense. True, stock market investments are associated with many sacrifices. You will have to spend a lot of time learning. However, most of the work that will be done by you will not involve live trading.

What does the Paretoprinciple say about this? 20% of the effort put in will translate into 80% of the results. The exchange will require you to spend most of your time reading books and training on the demo exchange.

If you notice that what you constantly open and close positions, changing your mind every now and then, you will notice that such a huge amount of work put in will not translate into the expected profit at all.


  • A lover of matters related to investing and finances. He runs a company dealing with financial optimization methods. Privately, a mother of four and a happy married woman. He enjoys playing the piano, music and singing. After hours he gives private lessons.

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