Scary title, eh? I'll just go ahead and dial it up a notch (cue Emeril: "Bam!"):
"What happens when the market collapses?"
At some point in your investing career, it will happen. You will be caught unaware. In all likelihood, you're going to lose a great deal of money when it happens.
When you least expect it
The really frightening part, however, is that the market has shown a proclivity to collapse at points when everyone thinks things are going swimmingly -- like right now. On March 10, 2000, when the Nasdaq hit its all-time high, there were more scheduled IPOs than ever before. Investors and entrepreneurs alike wanted to earn windfalls from a market that defied gravity, just like Pierre Omidyar at eBay
These were good, good times. Then, suddenly, the train jumped the tracks.
The pain of recession
Throughout history, whenever this has happened, it feels like nothing will push share prices up. For every piece of bad news, companies will tank. Good news gets shrugged off. And these collapses can go on, not for days -- like the sudden malaise the markets endured this past September -- but for years. Procter & Gamble
Unfortunately, there's not a whole lot you can do about market collapses. Recessions will happen. Bear markets will come.
There is something you can do to limit your exposure to them, however: maintain a low risk profile.
Rate your risk
Risk is something that too many investors ignore -- until, that is, they end up on the wrong end of it. The equation goes like so: "Higher Risk = Higher Return."
Risk is not a dial, though. Higher risk can also mean grievous losses, and it's after just such an event that many investors determine that their appetite for risk wasn't so high after all. And at that point, it's too late.
Risk can be defined many different ways, most of which are fairly inane. I define risk as the potential for permanent capital loss. Every time you buy shares of a company, you're buying it as it exists, plus some assumptions of future earnings and cash flow. The more expectations built into the future, the more risk you're taking.
Apple Computer
Similarly, Motley Fool Hidden Gems recommendations Blue Nile
Bring it on
All that said, I welcome a market collapse.
OK, that's not entirely true. I'm a red-blooded portfolio checker, just like you, and I feel sick when my stocks are deep in the red. But in my job, and in my investing, I yearn for situations where the market has made companies cheap when they deserve better. When people were jumping off bridges in 1974 because the market was terrible, Warren Buffett was deploying hundreds of millions of dollars into opportunities that he considered to be nearly risk-free. You know why Warren Buffett is celebrated as one of the greatest investors in history? Well, in no small part, it's because of what he was doing in 1974 -- increasing his exposure to stocks without really increasing his level of risk. Call that the year that made Warren Buffett "WARREN BUFFETT."
The Foolish bottom line
I have no pretenses to be that guy or any other guy. But I do know that when the market collapses, I'll be buying. And I expect those who take the long view with me and Fool co-founder Tom Gardner at Hidden Gems to use any imminent market fall to help earn substantial future returns.
Bill Mann is the co-advisor of Motley Fool Hidden Gems, the Fool's small-cap newsletter service. A brand-new issue, with two small-cap stock recommendations, releases today at 12 noon ET. Afree 30-day trialto Hidden Gems gives you full privileges to the service, including today's picks. Though Bill likes to talk about market collapses,Hidden Gemsis humming along since inception in July 2003 -- Tom and Bill's picks are outperforming the market at large by an average of 29 percentage points.
Bill does not hold shares in any company mentioned in this article. eBay is a Stock Advisor recommendation.We're telling you all this because of the Fool's recession-proof disclosure policy.
