The Largest Wealth Transfer Has Begun | How To NOT Lose Money

What's up guys? It's Graham here. So it's not often that I'll record an informal video like this without a whole bunch of fancy charts and research and analyst quotes, but something needs to be said about the current state of the market and the direction it's headed. Because it's gotten to the point where people are beginning to lose serious, life-changing amounts of money, and I feel like that's worth addressing, along with my own thoughts about what's going on.

I mean, at this point, it seems like there's a new article every day talking about how a recession is practically guaranteed while stocks plunge 40 percent as the economy crashes. And up until right now, I worry that too many investors have a distorted point of view of what it means to stay invested because these last two years have been a complete anomaly.

After all, I distinctly remember what it was like to graduate high school and to enter the real estate market near the absolute peak in early 2008. Like, for those who don't know, I basically started the moment foreclosures began to hit the market, before Lehman Brothers collapsed, prior to the credit market freeze, and at the very, very beginning of the stock market collapse. From the outside looking in, I probably picked the worst possible time to start a career in an industry that was about to see its worst decline in history.

Because before then, it was easy. You had investors like Casey, 24 years old, who was able to flip his first property for a thirty thousand dollar profit. Well, he took a three-week leave from his job to get enough deals in contract so that he could give his employer two weeks' notice. Pretty soon, he had built a portfolio of eight single-family homes. But when the market turned, he couldn't sell them. He was stuck in 2.2 million dollars worth of debt that he couldn't pay, and he filed for bankruptcy.

Of course, there were warnings that the housing market doesn't always just perpetually go up, including the lessons of the early 1990s, when the housing market dropped 10 to 20 percent and took nearly a decade to recover. But you know the saying "this time is different," and I didn't know any better as an 18-year-old just entering an industry that I thought I knew everything about because I had read a book on it.

Although, I gotta say, it was an eye-opening experience to start working as a real estate agent and immediately see your co-workers leaving for different jobs because their business seemingly dried up overnight. Within a short time after that, our office hired foreclosure experts to help their agents navigate the process of selling a home that was underwater. And I remember the general sentiment that no one wanted to buy anything because the market was only getting worse.

I know this sounds like a dystopian universe today, but back then, price reductions on homes were the norm. Homes were not getting multiple offers unless they were being auctioned off at the bank for 30 cents on the dollar, and very few people had the financial means to take advantage of those prices when 10 percent of the population was unemployed and the market entered a state of perpetual panic.

This wasn't just a quick drop either. From that point on, each year was progressively worse than the last. Prices just kept falling lower and lower for years, until 2012 prices started to recover and demand came back. That increase and drop was so massive, by the way, that even today, we're barely above the same level when you account for inflation. And that was my first experience into the world of investing.

I say this because in 2020, we got an extremely warped view on what it meant to make money, and that gave us a false sense of confidence because the Fed bailed us out. Now seriously, when COVID first became an issue, the market plunged more than 30 percent over 30 days. And the moment the market recovered was the day the Federal Reserve announced their economic support. Don't believe me? Here's the date of the market bottom, and here's their announcement. It's not a coincidence.

Now, all agreed that had they not done that, we would probably be in a far worse position than we are today. But that also meant that for so many people, that was their first foray into investing, where everything only goes up. Hedge funds get squeezed, retail traders get the last laugh, and Dave Portnoy says that Warren Buffett is washed up because day trading is the easiest game he's ever played.

But with the Federal Reserve pulling back their economic support, the party is coming to an end. We're left with an economy that's suffering from record-high inflation, slowing demand, and record-high prices. And that's what's being priced into the markets today. At these levels, we're erasing all the pandemic gains and returning to the price from before where all of this started.

So to bring some context to the entire situation, here's what you need to know. On the bright side, when it comes to bear markets, they've all followed a relatively similar trajectory. So in terms of what to expect, consider this technically a bear market is defined as a 20 percent decline from the peak, and since 1928, this has happened 26 times. Or if you're doing the math, this works out to a bear market happening on average every three and a half years.

So what we're seeing right now is not uncommon. In fact, it would be even more unusual if the market just continues to go up indefinitely. To give you some more context, here's a brief summary of how bad things could really get. In 1929, the Dow Jones declined almost 90 percent over three years in the worst stock market drop ever of all time. Well, basically, it's just an average drop for the crypto market, but I digress.

Even though on the surface it appears as though it would have taken you a full 25 years to break even when you account for deflation and dividends, as long as you didn't panic sell, you would actually break even in just four and a half years after that. In 1937 through 1941, there was another bear market with a loss of 50 percent. Now in terms of what caused this, it was theorized that it was sparked by a contraction in the money supply caused by the Federal Reserve. Sounds familiar, right?

But eventually, the markets recovered, and we saw one of the longest running bull markets in history after the end of World War II. And then the 1960s happened with a decline of 36 percent, along with the subsequent 48 percent drop through 1974. It was said that as Vietnam and social programs began to push up government spending, the Federal Reserve responded by tightening credit conditions, which caused the market to fall while also seeing the worst inflation since—well, I guess we're seeing today.

There's also the 2001 dot-com crash where the markets fell 36 percent while tech stocks lost 78 percent of their value and took over a decade to recover, if they were lucky. We also have the one that I distinctly remember: the Great Recession, while the market lost more than 50 percent after the collapse of the housing market. And besides a quick interruption with COVID, we've largely continued on the trajectory of one of the longest running bull markets of all time.

So that begs the question: in this case, some were already down about 25 percent from the peak. How much lower can we possibly go? Well, if we look at the past, we could see that the average bear market sees a decline of roughly 35 percent over 289 days, with the most severe being the 2008 Great Recession, which declined 51 percent over an entire year.

Now, unfortunately, with averages, you're never going to hit the average right on the dot. As you can see, judging by previous declines, anywhere from 20 to 40 percent is the most likely scenario, with the caveat that anything could happen, and just because it hasn't happened in the past, doesn't mean it won't happen now.

Ultimately, every single market is going to be different, and sometimes they just become self-fulfilling prophecies. Millennial millionaires, for instance, are delaying their purchases because of higher borrowing costs, and experts say that this is because of an environment that they've never experienced before, where more than a third of people making over a hundred thousand dollars say they're living paycheck to paycheck amid record-high inflation.

All of that is to say that sure, in hindsight, it's easy to point to something and say, "Oh yes, it was so obvious, everyone could have seen that coming." But as we've all witnessed, market conditions can change so rapidly. Predicting when or how something will happen is the equivalent to winning a lottery ticket. Sure, we hear about people doing it all the time, but the chance of it happening to you is relatively small, and it's even smaller that you'll be able to do it twice.

After all, there are dozens of economic situations working with and against each other to create the environment that we have today. Remove the Russia-Ukraine war or the Keystone Pipeline or a slightly different Federal Reserve policy, and guaranteed, there would be a series of other conditions that we would be talking about in its place.

But if there's anything that I've learned about having an unhealthy obsession with all things investing for over 14 years, it's this: First, there's always going to be a reason not to invest. When I first started buying real estate in 2011, for example, the market had already declined 50 percent, and I was buying some of these properties for 20 percent of their appraised value just a few years earlier.

But I was told to wait a little bit longer because shadow inventory was about to be unleashed under the market, causing it to fall even more. But guess what? That shadow inventory never came. The market started to recover, and I was glad I didn't listen to it. Since then, time and time again, I've been told about every impending collapse possible, and most of the time, it's probably best to ignore it because very few of them come true.

Second, investing is not a game. I hate to say it, but unless you're a degenerate personal finance nerd who has fun tracking their expenses on Mint.com to see how much money you could save, investing is boring. No, seriously, it's not supposed to be fun. I know that sounds weird for me to say because I think it's an absolute blast, but I'm not normal, and it's not a sign of a healthy market when people are having a blast trying to speculate on 70 percent returns every week.

At some point, you just have to remember if you are trying to beat the market average, you're either taking a calculated risk or you're gambling. Third, overconfidence will destroy your portfolio. From everything that I've seen, the moment you think you know it all and have it all figured out, you've already lost. Because of that, it's important to recognize that in a way, the less you know, the better you're gonna do because you're not going to overcomplicate things or take unnecessary risks.

For example, every single study shows the most successful investors simply buy a broad index fund consistently and hold it for 20 years. That's literally all you got to do, and no one does it because it's boring. Fourth, a market drop is probably going to be worse than you expect. Like, you know when you see a decline, so you buy the dip, but it keeps dropping? So you buy the dip even more, but it keeps dropping even further, and pretty soon, you run out of money, and then it drops even more.

Well, generally the market bottoms take place at absolute investor capitulation when all faith is lost and people think the economy is forever going to be doomed. Every generation is gonna have its "this time is different" moment that comes out of nowhere, and it's important to realize that things could drop way more than you think.

Fifth, good financial habits should be practiced in both good and bad markets. Even though sure, now is a pretty good time to take on a side hustle, earn some extra money, work some different hours, cut back on expenses, and live below your means, ideally you should always be doing that, making the most of your time regardless of how the stock market performs. In times like this, those good habits are probably going to save you ten times over.

And that's why I've always continued to live frugally, with the understanding that nothing could last forever. I guess I've just seen too many careers come and go, watched too many businesses completely disappear, and seen too many investors go belly up because they think "this can't happen to me." So I'm extremely and probably overly cautious in everything that I do. It's probably not the most optimal, but it does work for me, and it helps me sleep at night.

Plus, I just want to mention number six: it was found that half of the index's strongest days in the last 20 years occurred during a bear market. In another 34 percent of the market's best days took place in the first two months of a bull market, before it was clear that a bull market had begun. That's extremely important because had you just missed the top ten strongest days over five years, your overall return drops from 15 to 3.75 percent, especially when the best days come right after the worst.

That's why it's best to take it boring, play it safe, stick with the fundamentals that are historically proven to work, and subscribe if you want more information just like this the next time the market drops. So with that said, you guys, thank you so much for watching. Also, feel free to add me on Instagram. Thank you so much, and until next time!