First, a warning:
This is going to be a little different than usual...
You see, nine times out of ten, when Crowdability writes about technology, we focus on all the things that could go right—
From how technology can help solve major problems around the world, to how it can deliver big gains to early investors.
But not today.
Today we’re going to show you what happens when technology goes wrong...
But we’ll show you how you can still reap big gains even when it does.
New Generation of Trading
When “electronic stock trading” first started gathering steam in the ‘90s, it was hailed as an exciting technology advancement:
Trading securities the “old-fashioned” way—i.e., in person or by phone—was slow and cumbersome. Now it could now be done from anywhere, effortlessly.
This innovation made it easier and less expensive for ordinary investors like you to buy and sell stock.
Interestingly, it also made it possible for computers to trade stock...
These computers were programmed by economists, statisticians and traders, and they aimed to exploit tiny price discrepancies in the market.
Thanks to the fact that computers could do their job extremely rapidly, this strategy—called “high-frequency trading”—became extraordinarily successful:
In fact, by 2011, it was estimated that two-thirds of all stock trades were being executed by computers, and billions of dollars were being generated in profits.
But—surprise, surprise—a dark, unintended consequence soon reared its head.
Perhaps you recall a certain financial event from 2010, later dubbed the “Flash Crash.”
On that day, in less then 30 minutes, the Dow dropped nearly 10%.
It was the largest single-day movement in the history of the stock market.
What caused it?
A little bit of market manipulation—and a lot of high-frequency trading.
You see, once the computers detected a potential sell-off in the market, they sold, sold, sold—which caused the market to fall even further.
Then, this summer, the same thing happened again:
On Monday, August 24th, the market gapped down by 3.5% at the open—
The main cause?
Rampant computerized trading.
How to Profit From These “Glitches”
There were only three other times in the past 30 years that such a large market sell-off occurred: Once was in 1987, then again in 2001, and finally in 2008.
But what’s interesting is that In each case, the market bounced back within two weeks—in other words, stocks almost completely recovered.
And that’s precisely what happened last summer:
On August 25th, 2015, the Dow bottomed out at 15,666...
Two weeks later, on September 8th, it was back up to 16,492.
That’s a 5.27% bounce in just two weeks.
Individual stocks fared even better—especially tech stocks.
Apple rallied 8%...
And Intel 12%... all in the span of two weeks.
So while these financial events may be scary while they’re happening, history shows us that you might be well-served to stay calm:
When there’s a big sell-off—and there’s no fundamental reason behind it—it can signal an opportunity for big gains.
This is Why We Love The Private Markets
For those of you who can stay calm and afford to be contrarian in the midst of these sell-offs, you might find yourself wealthier.
Rational investors live for moments like that.
But it also reminds me of why Matt and I are so fond of the private markets as well:
When you invest in a private company, there’s no need to worry about computers going crazy and whipsawing the value of your investment...
There are no computers in the private market.
It’s quite simply, really:
If there’s a fundamental improvement in a business you invested in, it’s likely there’ll be an increase in the value of your investment.
Relatively speaking, it’s much less of an emotional rollercoaster—you’re not subject to the whims of irrational trading activity on a daily basis.
If you’d like to learn more about the benefits of investing in the private market, I invite you to review some videos we recently produced.
You can find them here on our free Resources page »
We hope you enjoy.