The core concepts of the "Crash Buying" investment philosophy and strategy

 The core concepts of the "Crash Buying" investment philosophy and strategy:

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1. Philosophy & Mindset: Fear Management

• Core Problem: Market crashes trigger instinctive panic because they feel chaotic, severe, and endless.

• Solution: Replace fear with knowledge. Understanding the historical frequency of declines and the mathematics of recovery transforms the unknown into a manageable probability.

• Key Mindset Shifts:

  • It’s okay to miss a crash. Drawdowns are statistically regular; another opportunity will come.

  • The goal is participation without breaking. The market rewards discipline and punishes emotional abandonment more than it rewards perfect timing.

  • Crash buying is not about bravery; it's about preparation, probability, and emotional neutrality.

2. Foundational Data: Historical Drawdown Distributions (S&P 500, 100 Years)

• Declines are tiered and predictable in their frequency:

  • -10%: Common. Happens ~every 3 years. A normal correction.

  • -15%: Uncomfortable but frequent. ~Every 4-5 years.

  • -20%: Serious. Bear market territory. ~Every 6-7 years.

  • -25% to -30%: Rare, crisis-level events. ~Once per decade.

  • Beyond -30%: Very rare, requiring systemic failure. Generational events (e.g., 2008, Great Depression).

• Takeaway: Severe crashes are statistically rare. A -15% decline is routine, not catastrophic. This knowledge calibrates emotional response.

3. The Recovery Mathematics: The Answer to "How Long Will I Be Stuck?"

• The critical question for investors is not just frequency, but time to breakeven from their specific entry point.

• Historical Pattern: The deeper you buy into a decline, the shorter your historical recovery time to your purchase price.

  • Entry at -10%: Typical breakeven in 3–4 years.

  • Entry at -15%: Typical breakeven in 2–3 years (~1 year faster than -10%).

  • Entry at -20%: Typical breakeven in 1.5–2 years (significantly accelerated).

• This creates a powerful mathematical advantage for patient, deeper entries.

4. The Personal Strategy: Scaled, Incremental "Crash Buying"

• Execution Logic (The "How"):

  • Rule: No buying before a -10% decline.

  • Method: Use incremental "shots." Start small at -10%.

  • Scale: Increase position size with each subsequent ~2.5% decline (e.g., small → medium → large → heaviest).

  • Peak Deployment: Reserve the largest capital allocation for the -25% to -30% range.

• Core Doctrine: "Save your courage for ~25%, not ~10%." Courage and capital should increase as the statistical outlook (frequency + recovery math) improves, even though fear is highest.

• Trade-Off Acknowledged: While deeper entries recover faster, waiting for them risks missing the dip entirely if the market doesn’t fall that far.

5. The Integrated System: Why the Scaled Approach Works

• It balances two objectives:

  1. Prevents Inaction: Small early positions at -10% ensure you participate and don't miss shallower corrections.

  2. Optimizes Capital & Psychology: Larger positions at deeper levels (-15%, -20%+) benefit from faster recovery, reducing emotional stress and financial uncertainty.

• The Inversion: This strategy inverts natural human impulse. Instead of buying less as prices fall (driven by fear), you buy more, guided by data.

6. Why Investors Fail & How to Succeed

• Why Most Fail (The Knowledge Gap): They lack understanding of frequency distributions and recovery math, overestimate psychological pain, and fail to prepare with a Financial Safety Net and Emotional Neutrality techniques.

• How to Succeed:

  • Prepare: Have a plan, a safety net, and emotional training before a crash.

  • Execute with Discipline: Stick to the scaling plan. Breaking discipline is far more dangerous than missing a single opportunity.

  • Focus on Process, Not Perfection: You don't need to predict the bottom. You need to participate without breaking.

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Final Summary in One Sentence:

Crash buying is a disciplined, data-driven strategy of incrementally scaling into market declines—starting small at -10% and deploying the most capital at the deepest, rarest levels (-25% to -30%)—based on the historical probabilities of drawdowns and the accelerated recovery mathematics that favor deeper entries, all managed by overcoming fear through knowledge and preparation.

Falling Prices can be a double-edged sword

Risk is more often in the price you pay than the stock itself.

Markets have fallen time and again because of some political or economic announcement.  Similarly, individual stocks and sectors often fall on weaker than expected earnings or unforeseen events.

During market sell-offs, the rapid decline of prices brought bargain issues that an investor could buy for a lot less than their pre-collapsed prices.

As others are selling in reaction to news reports, you can load up with value opportunities that can benefit from the subsequent price recoveries.  It is important to understand that the prices of solid companies with strong balance sheets and earnings usually recover.  If the fundamentals are sound, they always have and they always will.

From 1932 to today, the studies confirm that when bad things happen to good companies, they recover and usually quite nicely in a reasonable amount of time.  It has also been shown that high performance seems to beget lower returns, and low performance leads to higher returns in nearly all markets.  Today's worst stocks become tomorrow's best stocks and vice-versa.



Catching a falling knife

There is danger in trying to catch a falling knife, but even when stocks dropped 60% in one year, and bankruptcy and failure rates jumped fourfold, opportunities abounded.

Remember that one of the chief tenets of the value investing approach is to always maintain a margin of safety.  You can lessen the chances of buying a failure and increase your portfolio performance if you stick to the principle of margin of safety.  Don't try to catch an overpriced, cheaply made falling knife.

When stock prices fell after the bear markets, many investors were decimated.  On the other hand, value investor like Warren Buffett, was thrilled with all the bargains he found as a result of the collapse and said now was the time to invest in stocks and get rich.  The average investor and many professionals, having suffered through a bear market, wanted nothing to do with stocks and missed out on the chance to load up at these low prices.

You just had to catch the babies being thrown out with the bathwater.


Summary:

1.  Buying stocks that have fallen in price and yet still offer a margin of safety has resulted in successful investments.

2.  Although many find it difficult to leave their comfort zone and buy stocks that have fallen, those of us buying cheap stock realise that the bargains are found in the sales flyers and the new low lists, not in the highfliers (popular stocks) and the new high lists.





Examples:

Bear market of 1973 to 1975 Crash of the Nifty Fifty
The stock prices fell an average some 60% and many investors were decimated.  Warren Buffett in an interview with Forbes in November 1, 1974, described himself as feeling like an "oversexed guy in a harem".


1980s
Some of the large public utilities in US overcommit to nuclear power with disastrous financial results and fell into financial difficulty.  Many of them even had to file for bankruptcy to work out their difficulties.  After the Three Mile Island accident, the world interest in US nuclear power practically ground to a halt.  Few portfolio managers or individuals wanted to invest in these companies.  But those brave few who invested in Public Service New Hampshire, Gulf States Utilities, and New Mexico Power ended up with enormous returns over the balance of the decade as the  companies worked out their problems and returned to profitability.


Late 1980s and early 1990s
The fall of Drexel Burnham, the junk bond powerhouse and the implosion of the high-yield debt market, along with collapsing real estate prices, caused what is now know as the savings and loan crisis.  This crisis spread from the smaller S&Ls to the largest banks in the country.  Venerable institutions such as Bank of America and Chase Manhattan Bank fell to prices at or below their book value and had price-to-earnings ratios in the single digits.  Wells Fargo was hit particularly hard because it appeared to have significant exposure to a rapidly declining California real estate market.  Investors who did their homework and invested in banks during this time earned enormous returns over the decade that followed as the industry went through a merger boom that generously rewarded shareholders.  You just had to catch the babies being thrown out with the bathwater.


1992
After Bill Clinton took office, he appointed his wife Hillary to head a committee on health care reform that proposed a drastic program that would have dramatically, curtailed the profits of the pharmaceutical industry.  All the leading drug company stocks declined sharply.  Companies like Johnson & Johnson, fell to a level of just 12 times earnings.  Most investors shied away from the industry.  Investors who saw the opportunity in Johnson & Johnson realised that the stock was selling for the equivalent value of the consumer products side (Band-Aids and Tylenol) of the business.  You got the prescription pharmaceutical part of J&J for free.  Once Hillary care was a ded issue, the stock of J&J and the other pharmaceutical companies brought outsized gains to investors willing to take the plunge.


9/11 disaster
After the disaster of 9/11, American Express was viewed as being too dependent on air trael, and its shares fell from the ppprevious year's high of $55 to as low as $25.  Although American Express may have been facing some travel-related struggles, it was an enormously profitable company that sold at just 12 times earnings.  Investors who realized that companies of this quality are rarely this cheap and that the income stream from the credit card business offered a margin of safety have been amply rewarded in the years since.  American Express is another example of how catching the right falling knife can sharpen returns with high-quality stock at low prices.

Strategy during crisis investment: Revisiting the recent 2008 bear market

FRIDAY, FEBRUARY 26, 2010

Strategy during crisis investment: Revisiting the recent 2008 bear market

Although we may not know where the bear bottom is, buying in a down market may still lead to losing money. This is definitely true. As long as the purchase is not at market bottom, it may still result in losses for the time being. This is likely to be a short-term loss but compensated by a probable long-term gain. Even if we cannot time the market perfectly, we are definitely better off to “buy low and sell high” then to “buy high and sell low”.

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Prices fell but value intact

Presently stock prices have fallen sharply. 

• Banks are trading at 1x book value, 
• property stocks sold at 50% discount from net asset value, 
• utility stocks trading at single-digit price-earnings ratio providing an earnings yield of more than 10% net of tax and 
• there are many good stocks trading at dividend yield of 2x bank interest rates. 

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Warren Buffett, the second richest man in the world who makes his fortune from stock investment, is busy buying undervalued companies. He sees the value and he also sees prices detaching away from the intrinsic values.He said: “I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turn up.”

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Catching a falling knife

Some may argue that buying now is like catching a falling knife. If you are not careful, you may be hurt and suffer more losses from falling stock prices.There is no doubt that we may incur short-term losses as long as we do not buy at the bottom. On the other hand, who can determine where and when is the bottom. As long as there are still unknown events or hidden problems, an apparent bottom now may not be the eventual bottom.Since we do not have all the information in the market, it is almost impossible to guess where the bottom will be.

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In most cases, we only realise the bottom after it is over and by that time stock prices are running high with much improved market confidence. Market bottom could be there only for a short period. In most cases, market did not stay at the bottom waiting for investors. It will just move on.

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Since market moves ahead of the economy by about six months, the market bottoms out when the economy is still gloomy, news are still negative, analysts are still calling underweights and most investors are staying at the sidelines.

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Handling something we know is definitely much easier than dealing with the unknown risks, something which hits from behind without warning.When we invest during a crisis we actually go in with our eyes open. We know it is definitely risky but we also know it could also be very profitable. If we can handle the risk, the risk-reward trade-off will be very rewarding.

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Emphasise strategies

What we need is to buy near the bottom, not right at the bottom. Investors’ frequent question now is when to buy, that is where is the bottom? Perhaps it is more intelligent to ask how much to buy now since nobody will be able to guess where is the market bottom.

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Staggered buying is preferred over bullet purchase which is taking the risk of timing the market bottom. In staggered buying, a pre-determined amount will be set aside for investment over time, say in 10 equal portions. 

One common method of staggered investment is dollar cost averaging, an investment scheme made in equal portions periodically, either by a small amount monthly or larger amount quarterly. There are also several variations of staggered investment.

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Anyway, staggered purchase is a preferred method to avoid the anxiety of market timing and the mixed feeling of fear of further downside and worry of missing the market rebound. As long as the market is undervalued, the strategy of staggered investment ensures that investors are in and are benefiting from the undervalued market. 


http://klsecounters.blogspot.com/2008/11/strategy-during-crisis-investment.html  

http://myinvestingnotes.blogspot.com/2010/02/strategy-during-crisis-investment.html

What to Do in a Down (Bear) Market?

The stock market often falls under the conditions of the so called bull and bear markets.  Intelligent investors are well familiar with the conditions of both and know exactly what to do. 

Under a down market you have several options.

- One of them is to sell immediately in order to minimize your losses.

- Another option is to let the market work its way through the problem with no action from your side.

- A third option is to benefit from the stock decline and add some more to your portfolio. But, this should be done only if you don't perceive that there is something wrong with the company that has led to the stock decline.


Final Piece of Advice

Never forget that it is important to base your decisions on knowledge not on feelings. This means that being educated about the company and the industry from which your stocks come from, the market conditions under which you operate will be of small importance to you.

Learn to love stockmarket falls

• 13 Aug 07

Most people are net buyers of stocks throughout their lives, which means that market falls should be welcomed rather than feared.

You could be forgiven for thinking that there had been some major ructions in the stockmarket over the past couple of weeks. There’s been talk of crashes, collapses and crunches, with well-known Wall Street pundits shouting and screaming (if only for effect). So far at least, though, we haven’t even seen the 10% drop that people arbitrarily consider is necessary for a ‘correction’ and the All Ordinaries Index is still above where it stood in March.


The truth is that fear and panic get people’s attention and the media is well aware of it. But it’s at times like this that investors need to stand back from the crowd and make a cold assessment of what’s going on. No doubt some companies are affected by recent turmoil in global debt markets, but some have, and/or will generate, all the cash they need for their future investing plans and have little to fear from a recession, which might in fact help them take market share from competitors. Yet these companies have been getting cheaper along with everything else and we’ve been licking our lips.


Only a few stocks have so far drifted into our buying range – Corporate Express, Ten Network and Servcorp (almost) – but we’re hopeful of bigger falls and further opportunities.


It’s a truism to say that, all things being equal, you’ll do better from stocks if you buy them cheaply. But what people forget is that for most of their lives, they’re net buyers, or at least holders, of stocks. And the ideal situation is to reach retirement with enough in your pot that you never have to become a net seller. So for most people, for most of their lives, stockmarket falls are good things.

Price and value


The crucial point to understand is that the price of a stock and its value are two different things. The market sets the former and we spend our days trying to estimate the latter. To make our life easier, we generally avoid poorly managed, debt-laden or cyclical businesses where predictability is poor, and we look for a margin of safety to protect us against an error of judgement – the more uncertain we are about a company’s value, the greater the margin of safety we require.
Most of the time, price is pretty close to value. But sometimes it gets out of whack, and occasionally by enough to give us a decent margin of safety. It’s these situations that present the greatest opportunities for canny investors and the greatest dangers for those who succumb to understandable but irrational mood swings. Preparedness makes all the difference.


Imagine you’re researching a company, Little Acorn Limited, which operates in a predictable industry, has decent management and pays no dividends. It reinvests all its profits, meaning that returns are entirely in the form of capital growth. You’ve done the work, and are as comfortable as you can be that Little Acorn will grow earnings per share (EPS) at 10% per year, from the current level of $1.00, with very little chance of variability.


Deeming Little Acorn to have all the right stuff, you buy the stock for $15 – a price-to-earnings ratio of 15. If your estimate of earnings growth is accurate, then EPS will grow from $1.00 to $2.59 over the next decade. If the market is still happy to pay a PER of 15 at that point, then the stock will trade at around $38.85, and you’ll have achieved an annual return of 10%, in line with the earnings growth.


The future is always uncertain


Of course, the stock might trade lower in a pessimistic market in 2017, giving you a lower annual return (but an underpriced stock that’s likely to do well in future years). Alternatively, it might trade higher, giving you a larger annual return (but an overpriced stock that you might choose to sell).


Which of those possibilities eventuates is of some importance. But what happens in the stockmarket over the next week, month or year doesn’t make a lick of difference as to how the market will view Little Acorn in ten years’ time.

Great oaks from little acorns grow
	Price in 2007	Price in 2017	Annual return
Expected	$15	$38.85	10.0%
outcome	$8	$38.85	17.1%
Lower	$15	$25	5.2%
outcome	$8	$25	12.1%
Higher	$15	$50	12.8%
outcome	$8	$50	20.1%

So let’s say that shortly after purchasing Little Acorn for $15, the market tanks and takes Little Acorn with it – down to $8. The talking heads everywhere go berserk over the ‘blood on the streets’ and you’re staring at a ‘loss’ of almost 50%. The emotional investor gets the chance to do some real and permanent damage here. Avoid this at all cost.


Assuming that Little Acorn is still as likely as ever to grow its EPS at 10% per year and arrive in 2017 with EPS of $2.59 and a stock price of $38.85, your forecast of its future is unchanged, and your expected return from yesterday’s investment is unchanged at 10% per year. You won’t get that return if you sell out now. But if you do nothing but hold, your eventual wealth will be just as great as if the share price followed a straight line from $15 to $38.85 over the course of a decade.


But wait there’s more


If you have some spare cash, though, you can actually improve your position, by going against the crowd and buying more shares in Little Acorn at $8. At that price, your additional investment will compound at 17% per year until the shares trade at $38.85 in 2017, dragging up your average return in the process. So the market tumble has actually provided an opportunity.


Of course, the real world isn’t so neat. Market crashes can hurt the economy, affecting company profits in the short and medium term. And the 2017 value of the stock will swing based on both the mood of the markets then, and the company’s growth in the intervening years. But that’s the case regardless of whether stocks are cheap or expensive today. Which brings us back to the trusim that the less we pay for our stocks, the greater the bargains they’ll prove to be.


So remember that when the market takes a tumble, it’s just changing the price that it’s setting for stocks. The value of those stocks, all things being equal, will remain the same. You don’t have to sell your stocks, but you can choose to buy, if you have the spare cash and can find something suitable. Viewed like this, market crashes won’t do any harm to long-term investors, but actually offer you the chance to compound your money at a greater rate.

http://www.intelligentinvestor.com.au/articles/230/Learn-to-love-stockmarket-falls.cfm

Most look for the bull and neglect the bear. DON'T NEGLECT THE BEAR

Jim Rogers wrote - Don't neglect the Bear - in his book 'A Gift to My Children':

What is it that most investors fail to consider?  Most look for the bull and neglect the bear.  As an investor, I am always in search of "what is bearish."  When people are crazed about an overheated market and are oblivious of other investment possibilities, that's when I find a good deal.

During the stock bubble of 1998, when most people ignored commodities, I started up a commodity index.  Commodities had been in the doldrums for years, so no one had made any money.  Most people fled the field, and few young people even studied natural resources.  Fewer still went into farming or mining (MBAs were all the rage then, remember?). the end result being that we currently have a shortage of farmers and geologists.  That is  true in other countries as well.  These factors led to a multiyear decline in productive capacity, while demand kept rising.  The returns show how well commodities have done.  The Rogers International Commodity Index, which I founded in 1998, quadrupled over the next ten years, while the Standard and Poor's 500 index of stocks rose about 40 percent.


Also read:

Betting on the Blind Side

Learning from Michael Burry: from being a medical resident to being regarded as one of the greatest investors in recent history.

Did you buy when the stocks were on sale?

Did you take advantage of the best investing periods Mr. Market offered the last 20 years? Did you take advantage of Mr. Market or did you fall victim to Mr. Market during these times?

My first recollection was 1987. It would have been wonderful to have invested then, but my priorities were elsewhere and not in stocks then. I recalled the big fall in October 1987. Those invested in the stock market were stunned by the rapidity of its fall in a day. Many predicted the collapse of brokers and investment bankers. But the recovery was quick. Those who sold would have lost. Those who held or bought more were better off.

The next period was in 1997. It was the Asian Financial Crisis. It started with the Thai Baht being sold down. In its initial phase, it was thought that this could be contained to Thailand. Soon it spread to Indonesian rupee, and very soon after, Malaysian ringgit. The tremendous bull run of the decade had created a huge bubble which popped. The shares in many companies were trading at ridiculously high valuations at the peak of the bull market prior to the crisis. By 1998, the stock market had lost by a huge amount. The index plummeted to a low of just above 300. There were panic sellings by big investors, above all, the foreign funds. What did you do as an investor during this period?

Another fantastic period was in 2001. This was when the SARS epidemic hit Singapore. The broad market was sold down. Those who bought during this period would have profited.

This brings us to the present period. The best prices were seen during the October 2008 to March 2009 following the post-Lehman crash. By then, the bear market has been in place for more than a year and a half. Many stocks were already lowly priced and the post-Lehman crash led to even lower prices of these stocks. What did you do during this investing period?

These were the 4 periods from 1987 to 2009 when the market sold off by a huge amount. Many stocks were priced at low valuations. What did you do during these markets?

Did you buy?
Did you sell?
Did you hold?

Buffett is right. "Be greedy when everyone is fearful and be fearful when everyone is greedy."

What further lessons can you learn from these four periods?

Instead of fearing a bear market, you should embrace it.

Your Money and Your Brain

Why, then, do investor find Mr. Market so seductive? It turns out that our brains are hardwired to get us into investing trouble; humans are pattern-seeking animals. Psychologists have shown that if you present people with a random sequence - and tell them that it's unpredictable - they will nevertheless insist on trying to guess what's coming next. Likewise, we "know" that the next roll of the dice will be a seven, that a baseball player is due for a base hit, that the next winning number in the Powerball lottery will definitely be 4-27-9-16-42-10- and that this hot little stock is the next Microsoft.

Groundbreaking new research in neuroscience shows that our brains are designed to perceive trends even where they might not exist. After an event occurs just two or three times in a row, regions of the human brain called the anterior cingulate and nucleus accumbens automatically anticipate that it will happen again. If it does repeat, a natural chemical called dopamine is released, flooding your brain with a soft euphoria. Thus, if a stock goes up a few times in a row, you reflexively expect it to keep going - and your brain chemistry changes as the stock rises, giving you a "natural high." You effectively become addicted to your own predictions.

But when stocks drop, that financial loss fires up your amygdala - the part of the brain that processes fear and anxiety and generates the famous "fight or flight" response that is common to all cornered animals. Just as you can't keep your heart rate from rising if a fire alarm goes off, just as you can't avoid flinching if a rattlesnake slithers onto your hiking path, you can't help feeling fearful when stock prices are plunging.

In fact, the brilliant psychologists Daniel Kahneman and Amos Tversky have shown that the pain of financial loss is more than twice as intense as the pleasure of an equivalent gain. Making $1,000 on a stock feels great - but a $1,000 loss wields an emotional wallop more than twice as powerful. Losing money is so painful that many people, terrified at the prospect of any further loss, sell out near the bottom or refuse to buy more.

That explains why we fixate on the raw magnitude of a market decline and forget to put the loss in proportion. So, if a TV reporter hollers, "The market is plunging - the Dow is down 100 points!" most people instinctively shudder. But, at the Dow's recent level of 8,000 that's a drop of just 1.2%. Now think how ridiculous it would sound if, on a day when it's 81 degrees outside, the TV weatherman shrieked, "The temperature is plunging - it's dropped from 81 degrees to 80 degrees!" That, too, is a 1.2% drop. When you forget to view changing market prices in percentage terms, it's all too easy to panic over minor vibrations. (If you have decades of investing ahead of you, there's a better way to visualize the financial news broadcasts: see---).

In the late 1990s, many people came to feel that they were in the dark unless they checked the prices of their stocks several times a day. But, as Graham puts it, the typical investor "would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons' mistakes of judgment." If, after checking the value of your stock portfolio at 1:24 p.m., you feel compelled to check it all over again at 1:37 p.m., ask yourself these questions:

• Did I call a real-estate agent to check the market price of my house at 1:24 p.m.? Did I call back at 1:37 p.m.?
• If I had, would the price have changed? If it did, would I have rushed to sell my house?
• By not checking, or even knowing, the market price of my house from minute to minute, do I prevent its value from rising over time?

The only possible answer to these questions is of course not! And you should view your portfolio the same way. Over a 10- or 20- or 30- year investment horizon, Mr. Market's daily dipsy-doodles simply do not matter. In any case, for anyone who will be investing for years to come, falling stock prices are good news, not bad, since they enable you to buy more for less money. The longer and further stocks fall, and the more steadily you keep buying as they drop, the more money you will make in the end - if you remain steadfast until the end. Instead of fearing a bear market, you should embrace it. The intelligent investor should be perfectly comfortable owning a stock or mutual fund even if the stock market stopped supplying daily prices for the next 10 years.

Paradoxically, "you will be much more in control," explains neuroscientist Antonio Damasio, "if you realize how much you are not in control." By acknowledging your biological tendency to buy high and sell low, you can admit the need to dollar-cost average, rebalance, and sign an investment contract. By putting much of your portfolio on permanent autopilot, you can fight the prediction addiction, focus on your long-term financial goals, and tune out Mr. Market's mood swings.

Ref: Intelligent Investor by Benjamin Graham