I Analysed Every Market Crash Since 1929. Here's The Pattern I Found.
The shocking reason some investors consistently profit from downturns (while most lose everything)
Ever wonder why the smartest investors seem to make money from market crashes, while everyone else panics and sells at the bottom?
I did.
So I decided to do some research...
I spent months analysing every major market crash since 1929. We're talking about sifting through thousands of pages of market data, historical records, and investor psychology research. I also interviewed multiple fund managers who've successfully navigated multiple crashes.
What I found shocked me.
The real pattern behind successful crash investing has nothing to do with what most experts teach.
The Research Method (And Why It Matters)
First, let me be clear about what I mean by "market crashes." I specifically looked at:
Every 20%+ market decline since 1929
Periods where the VIX exceeded 40
Market events that triggered circuit breakers
Flash crashes and liquidity events
Here's where it gets interesting. The pattern I discovered wasn't about technical indicators, fundamentals, or even timing. It was about something much more fundamental.
The Problem With Conventional Thinking
Traditional investing advice tells you to focus on fundamentals—read balance sheets, analyse earnings, etc. And over the long run, that’s absolutely the right approach.
But here’s what most people miss:
In the short term, markets don’t move based on fundamentals. They move based on psychology.
That’s why you see wild price swings on minor news. A 0.25% interest rate hike doesn’t suddenly change a company’s long-term value, but if traders panic, the stock price can collapse anyway.
This doesn’t mean fundamentals don’t matter—they do. Over time, stock prices tend to reflect the true value of businesses. But in the heat of a crash, perception takes over.
And perceptions are fragile.
While it's crucial to monitor fundamentals during these volatile periods, the real opportunities emerge from the gap between market perception and underlying reality.
How Miscalculations Create Profit Opportunities
When fear or euphoria drives prices far from fundamental values, that's precisely when disciplined investors can find their most promising opportunities.
Look at what happened in 2022: The market crashed as investors convinced themselves everything was doomed. "We have inflation, and that's bad. And the rate increases to fight it are sure to bring on a recession, and that's bad." Pure pessimism.
Then the narrative flipped. Investors decided inflation would cool and rate cuts were coming. The S&P 500 soared 54% over the next 21 months through July 2024.
Did fundamentals justify such a rapid turnaround? No. But investor psychology did.
This is the cycle—over and over again. And it creates two major opportunities:
Buy when Mr. Market is overly pessimistic. When stocks are selling at absurdly low prices, it’s usually not because the businesses are collapsing. It’s because investors are scared.
Sell when Mr. Market is overly optimistic. When a stock is priced for perfection, any small hiccup can send it crashing. If you’re holding an overhyped stock, don’t wait for reality to catch up—take the profit before the mood shifts.
The Cognitive Biases That Wreck Investors
If this is so obvious, why do most investors get caught on the wrong side of these swings?
My research revealed specific psychological triggers that drive market moves:
The Cognitive Dissonance Effect: The human brain is wired to ignore or reject data that contradicts prior beliefs. Investors are particularly good at this.
The Contagion Pattern: Bad news in one market spreads to others, often irrationally. Like a game of telephone, the message gets distorted but still drives action.
The Memory Gap: As John Kenneth Galbraith noted, financial memory is incredibly short. This allows the same patterns to repeat.
How to Exploit Mr. Market’s Irrationality
Most investors spend too much time trying to predict the future. That’s a losing game. Instead, focus on identifying when Mr. Market is at an emotional extreme.
Look for absurd pessimism. When high-quality businesses are trading at multi-year lows despite solid fundamentals, start buying.
Watch for euphoria. When people start saying, “This time is different,” and valuations look ridiculous, start selling.
Ignore the noise. The market’s mood swings will tempt you to react emotionally. Don’t. Have a plan and stick to it.
The Bottom Line
Mr. Market is an emotional wreck. He’ll try to convince you that every rally is the start of a new golden age and every downturn is the beginning of the end.
Your job? Don’t take him seriously.
Instead, use his mood swings to your advantage. When he’s panicking, buy. When he’s euphoric, sell.
Because when Mr. Market miscalculates, opportunity knocks.
On that note, here’s an opportunity for you…
🔥 Special Founding Member Offer:
In the build-up to Schwar Capital going paid (official announcement coming soon), founding annual members will get both Schwar Capital and Schwar's Radar for just $199 a year - a fixed price forever and current discount of 33%.
Spots are selling fast! Only 202 remain out of the 250 allocation, so it's first come, first served. Offer ends March 1st.
You can pledge an annual membership to Schwar Capital here:
We hope you liked this post and have a great week ahead,
Dom
Founder & Chief Investment Officer
Schwar Capital
Question: What's your experience with market psychology? Have you ever noticed yourself or others getting caught up in market euphoria or panic? Share your story below - I read + respond to every comment! 💡
📌 PS - If you found this post valuable, please consider sharing it with other investors. Your share helps us keep writing content that helps investors build and compound their wealth. 🙏
Thanks for reading Schwar Capital! Subscribe for more content like this.
Disclaimer: The content provided in this newsletter is for informational purposes only and does not constitute financial, investment, or other professional advice. The opinions expressed here are those of the author and do not necessarily reflect the views of Schwar Capital. Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results. The author may or may not hold positions in the stocks or other financial instruments mentioned. Always do your own research or consult with a qualified financial advisor before making any investment decisions.
True words. Great post! Thank you SC!
Great post!