Stock Market Crash | The Most Important Mistake You Will Make In A Falling Market

fear and greed

It is a well-known fact that the markets are ruled by two human emotions: Fear and Greed. I am going to show you why both these emotions can cause you to make enormous mistakes in a stock market crash and why you should prepare yourself now to avoid making them.

Incidentally, I am going to talk about a mistake that 85% of people make in a market crash and one that I myself made in the year 2000 which caused me heavy losses. If you learn from this, you can avoid financial suicide.

Remember: the wise man not only learns from his own mistakes, but from other people’s mistakes…

The Dot-Com Donkeys

I will never forget January 2000 where I had my first taste of dabbling in stocks. In case you don’t remember, that year was also the height of the dot-com bubble. Technology stocks were soaring through the roof and greed had control of the market. Ordinary people from taxi drivers, teachers and plumbers were drooling at the idea of making a fortune in stocks.

I had been watching the stock of one particular company very closely. Exodus Communications Inc (EXDS) had tripled in value from $20 to $60 in just two months. I was thinking to myself, wow what if this stock now goes to $100, $200 – heck, all the way to the moon! How could I miss such an opportunity!  (see chart below)

EXDS Exodus Communications Stock

I finally bought the EXDS at $65. Now all I had to do was sit back and watch my trading account get fatter than a turkey before thanksgiving. By March 2000 the stock was just under $90. I could not believe my luck. “Good call!” I was saying to myself.

Very soon, my luck ran out. By April of that year EXDS was at $50 and by May it was at $40. Then a voice inside my head said: “Hey, why don’t we buy some more – now they are cheaper!” I dug into all my savings and I spent every last penny on buying even more of that stock. After all, it was an “investment”.

“Buy low, sell high”, right? Isn’t that what we have been taught?

Wrong. By May of 2001, a year later, the stock had plunged to less than $10. This was an 85% drop from the original price I had bought it at. Eventually, in September 2001, I was finally put out of my misery: EXDS filed for bankruptcy.

Fear and Greed

There is no doubt about it. What I did in the year 2000 is what “donkey” investors do – also referred to as “dumb money”. The smart money was selling technology stocks and dumping them unto the small guys. This is the way the markets have always worked and will always work.

Two emotions were ruling the marketplace:
1) Greed: the desire to make money
2) Fear: The fear of missing out on a huge opportunity

Notice that this is a different kind of fear than the one experienced by investors during a market crash: the fear of losing money.

The No.1 Mistake

What I want you to understand is that you must never buy a stock (or commodity) simply because it is “cheap”. That is not a good enough reason to buy. What you are essentially doing is trying to catch a falling knife! You are going to get hurt.

This mistake is often perpetuated by the misleading phrase: “Buy low, sell high”. This phrase is often misinterpreted for: “If it is cheaper then buy it, and sell it when it gets more expensive”. That is total garbage.

You see, what most people don’t realise is that when a stock (or commodity) is falling, the trend and momentum direction of that market may have changed.

To put it very simply: if a stock is deliberately moving downwards and gaining momentum (or speed) in that direction, and you try to stand in front of it (by buying the stock), it will crush you. You do not stand in front of a freight train.

Here is a case example:

In 2008, friends were telling me they were buying Lloyds TSB shares at £2.00 ($3 USD) because they thought it was a bargain. It was not – that company’s share price went all the way down to 50 pence! Those shares have not recovered since then and at the time of writing sit at 35 pence (see chart below):

Lloyds TSB Share chart

Losing Time

I know what you may be thinking: “What if you waited a few years for the price to recover – then at least you’ll get your money back and break even.”

OK, let’s say that you are lucky enough that your stock recovers and in three years it has come back to the original price you bought it at. You have your money back, well done. But you have lost something you will never get back: Time. Three years!

During those three years you could have been shorting that market (making money downwards – and more on that in upcoming posts), or investing in stocks that were going up.


Be prepared. If we are indeed heading for another stock market crash, and I believe we are, then you need to take control of your emotions right now!

Stocks will get cheaper, and cheaper. If you listen to the voices of greed inside your head saying to you: “Hey, at this price, this stock is a bargain!” you are setting yourself for financial suicide. For the bargain hunters, there is only one way their story will end: in tears.

I will show you in later posts that the stock or commodity needs to show some positive signs of strength before we decide to buy it.

Did this article help you? What are your own views? Have you made similar mistakes? Feel free to leave me your comments below.


  1. Your posts, commentary, and videos are actually revealing, exceedingly useful and enlightening. Thanks.

  2. As I am learning from the reading I am doing, you need to have several indicators, momentum, MACD etc and the more you have giving you a positive sign the more likely you are to predict a trend change and this will put you in a position to decide to buy, where to put your exit strategy and to finally exit. It would have been interesting to see the other factors, trendlines etc you used with these prices.

  3. Debbie – you are right. But be careful about extensive use of indicators. They are not holy grails – they are just tools. use them with a proper trading plan. Keep it simple.

  4. Thanks john. Glad you like them

  5. Useful for a novice like me. An eye opener not to allow the primitive desire of fear and greed overcome rationality. Thanks for the post.

  6. How can we know when a stock is really a bargain?? Thank you for your post, are very didactic

  7. How do you view gilts as an investment now whilst the equity market is in such turmoil??

  8. Sorry Richard – Gilts is not my area of expertise. Thank you for your input though.

  9. Thanks for the post very accurate about the lloyds tsb situation. Banks run the world thats why the banks got the little government to buy shares at 70p fooling the public that if the government bought lloyds shares then the must be a good investment. I know so many people who are holding lloyds shares losing time oh and money.

    Great work keep it up

  10. good explaining of fear & greed. Thanks!

  11. Thank you for your interesting article! I would like to ask you one additional question – what are positive signs of strength the stock or commodity needs to show some before we decide to buy it? Thank you for your answer!

  12. A trader who speaks the truth and admits his losses, it’s quite refreshing!

    Keep it up!

    Thanks Alessio


  13. Thanks Frank – it pays to be honest – specially in trading. Best wishes, Alessio

  14. If 70% of all trades on the US stock exchange are Automated trades driven by computers in microseconds, then the concept that that market is ruled by Fear & Greed only applies 30% of the time. The other 70% of the time …its driven by the Greed of the people who write the trading algorithms.

    Trading systems exist , people use them and follow their signals to remove human emotions from the trading to limit losses & let profits run, but few people can take instructions from a computer ( its insulting to human intelligence because people always know better ) & no trading system is perfect ( unless you are its creator and your trying to sell it ).

    Heres my solution: Ban: short selling, all derivatives, all forms of equity leverage, automated trading, day trading. Then the stock market might actually be of benefit to humanity.

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  16. Thank you for sharing your informative experience.
    What if deciding to buy a stock which already is in a rising trend? What can you say about fear and greed in this situation?
    All the best

  17. What you just explained is Jim Cramer’s strategy! He always tells people to buy high and sell low on his TV show.

    A very recent example: He said to buy NFLX at 280-300 and sell at 125.

    Some people love to lose money

  18. really refreshing info for the markets based on personal experiences; but for s simple husband like me; what do you use to know the momentum to buy an specific stock; i read your article in forbes and your brutally honest interview in bbc

  19. Chad – thanks for your informative comment. I respectfully disagree with you. We need short-selling for at least 3 reasons:
    (1) It creates more liquidity and activity in the market and
    (2) the short-sellers are usually the first ones who jump in and buy stocks when they are falling to cover their short positions. This creates a bottom in the market, thus enticing the buyers (who had been jittery about entering the market) to also step in and buy.
    (3) Whenever a ban on short-selling has been made on the markets, that market has fallen even deeper (e.g. 2008).

  20. It takes some doing to recall the climate of insanity and greed in the year 2000. The Nasdaq hit 5,000 that year (today it is at 2,415). People literally were expecting to multiply their money in a few months on any stock that was tech related. I put a pile of cash in a tech stock at $40 (yes, fear of missing out ) and within a few months it was under $5. The only good news was I didn’t get greedy and buy it again on the way down.

    It was a very important lesson to learn though and I managed to avoid the lead up to the carnage of 2008, when pundits like Ben Stein were saying things like ‘buy now, If these financial stocks get any cheaper they will be giving them away in cereal boxes’…

  21. are u italian? or speak italian language?

  22. Thanks Erick. watch out for my upcoming posts.

  23. Interesting. I like Jim Cramer. I know he sometimes gets it wrong but who doesn’t? It takes guts to stick your neck out and say well, this is what I am going to do. Thanks for commenting.

  24. Very good question Volkan. I would still want to trade that trend – BUT the danger is that that trend could be ending soon and that the upside (or downside) could be limited. The momentum of that trend could be coming to an end. I am going to comment on these issues in upcoming blogs. Keep reading. Thanks.

  25. I am from Argentina. thank you . I learn a lot with your article but most important thank you because you tell the truth even though it hurts. I am keeping reading your articles. I am an Industrial Engineer and a I am coursing a MBA in Finances.

  26. Very nice simple article Alessio. Some many people in London are heading towards Silver. Some Pundits saying its heading towards crash down to $22-24. Some experts saying fundamentals are in its favor, it will go in three digits. Whats your take on that. Thanks

  27. Made some of these very same mistakes during the 2008 crash!

    Thank you for your insights! They are greatly appreciated!

    Keep them coming!


  28. I say that opinions can be dangerous things. I believe silver has some good long term potentials – until we see otherwise. If silver takes out its lows at $26.15 and closes below it, then I am going to get bearish on it. Until then, I am looking for long setups. Personally, I wouldn’t worry too much about the fundamentals – price is KEY. Thanks for your input.

  29. thanks Lisandro for commenting. I try my best. cheers.

  30. Just a big THANKYOU for your honesty and `jaw-dropping` effect on not only the BBC! Hope to be seeing you on The Keiser Report very soon!

  31. Hi, Alessio. I come from Hong Kong. I have the similar experience as yours during the market surge in 2007 and got lost big……

    Yes. I totally agree with you that we should NOT catch the falling knife and should ONLY buy stocks when there are signs they are turning UP.

    This is a nice blog. Keep it up.

  32. This post has been a real eye opener for me and I look forward to reading more of your advice.

    Thanks for sharing

  33. Alessio surely the wish move with those Exodus shares would have
    been to sell in march 2000 , taking a $25 per share profit. Better to
    take a small profit than watch your money disappear . The share price
    didn’t turn downwards overnight so weren’t there signals telling you
    that maybe you should sell ? ( i’m a novice at all of this hence the query ).

    cheers , Martin

  34. Dear Alessio, massive respect to you for your honesty and these articles.
    I am concerned with this house of cards / fiat monetary system collapsing.
    If it gets real bad there could be a run on the banks? I am considering taking savings out, however am also a newbie trader, do you think trading accounts could be at risk too (other than normal risk of trading of course!)?
    Thanks for your time and all the best.

  35. i just wana say thank you for your honesty and waking me up at a very right time, not just because of your interveiw with the BBC which i watch alot but because of the above article.
    i started trading for myself in early 2008 and was making around £10000 a week (i had well over £800K plus TD WATER HOUSE gave me another £500k to invest, but i had to settle the £500K back in 25 working days or T25 as they call them here in the UK.

    cut the story short, by early march 2009 i lost every thing i had and went bankrupt because i had to pay back TD’s money which i had invested, i had no money to pay back and they sold my share took thier own money. nothing left and i still owed them 80K, which i could not pay.

    now i am buying the same shares, RBS and LLOYDS and am making some profit but and that’s a big BUT, i will wait and see what happens, i must be patient this time.
    keep up the good job and thank you

  36. Alessio, very refreshing commentary on the dynamics of the Market on your BBC interview. What are you suggesting to short -individual stocks or stock indices themselves?
    Thanks for sharing your views and in plain simple uncomplicated English. A first!

  37. You ROCKED MY WORLD with that BBC interview. Ignore all the haters — they’re projecting on you. It was clear that your message was one of warning and empowerment for everyone.

    I’m a total beginner at this and THANK YOU for your site — I look forward to learning from you. I’d be willing to pay a monthly membership even. TEACH ME! I’m in NYC and would so appreciate if you do an article on “what to do with $10-20K if you’re a beginner in investing in the USA.”

    Btw this guy is a great web designer Did these 2 sites: and He can make it so your answers here appear below whichever comment they are a response to.

    THANK YOU for being who you are and for your noble heart. I look forward to reading everything here.

  38. Hi Conor – personally I prefer shorting both individual stocks and the index (but using futures). If I was going to short an index like the Dow Jones or the S&Ps, then I would do it using “spreadbetting” or Stock Index futures (Dow Jones e-mini futures). You can do this on Tradestation.

  39. Zaher – that is a very interesting and insightful story. I thank you for sharing it with me. I think a lot of people can learn from your experience and learning lesson – the risks involved in trading are enormous. I am glad to hear it has not stifled your passion for trading. Good for you my friend. Keep it up and happy trading! Maybe you can write an article for me about your story and I will post it on my blog as a contributor (I’ll give you full credit).

  40. That’s a good point Matt. Listen, if banks are not safe, then no particular trading account is safe either. I would take extreme caution, whatever you do. Best wishes to you.

  41. Martin that is a good point. The problem is that just like a lot of traders and investors out there (the 85%) I had absolutely no exit strategy. Remember, everyone is a genius in hindsight. That is why it is essential that you have a detailed plan as to exactly how you will decide when to sell or exit the market. (psychologically, most amateur investors hold on to a stock because they feel it is going to rise much higher but they lose all objectivity when the stock goes into a loss).

  42. Thanks Ken. I’ve been to Hong Kong – it is an awesome place. I look forward to going back. Thanks for reading and commenting on my post.

  43. Thanks Joey. I am sure it was a learning experience for you. Take care.

  44. thanks alessio for the info. i really wish more people in your position would educate the amatures about all the crooks on wall street and take control of there financial future. most rely way to much that everything is gonna be ok. there is so much oppertunity in these markets and people are just watching it go by. i guess its better for us little guys but still sad to see everyone so blinded by the facts

  45. Pingback: Stock Market Crash | The Most Important Mistake You Will Make In A Falling Market | Lloyds Share Price

  46. Hey Alessio, one thing that we can also be watching very closely, is the enterprise’s market, news, changes in command,be really close to, beyond these papers, the day by day of the enterprises….those things are too a good and an important way to make a “smart money”. But always being carefull with speculations and “purchased news”, like we have a case here in Brazil lately, called: the Mundial case. I want to be a trade too, but last month I subscribe on a brokerage, and because I have some “debts” ahahahaha in my name with other banks, they denied my cadastre…ahahaha……In UK, if a person have debts in name, cannot invest?..but I’m not discouraged, I’ll be a trader someday…ahahaha..I’m reading more and more about all stock market, that’s why I found you in BBC, great fan of you and your real way to talk, man! Hugs…..

  47. There are some more “bad” words next to greed and fear. Haughtiness and impatience.

    In 1997 I made some fine trades. First I traded some US Small Cap shares. The gains profits were good but I wanted faster “results”. So I traded warrants (Index and shares). This went quite well too. But the markets were great in early 1997 so most traders did well.

    I made it form 5’000 Swiss Francs to 50’000 SFR in just 6 months. I thought that I could quit my job and become a full time “home day-trader”.

    In early October 1997 I was absolutely sure that a downwards correction was about to come very soon. So I invested 50% of my trading capital into a PUT Warrant. Very short term. The crash didn’t come. The Warrants expired with 100% loss.

    A a good friend at “Credit Suisse” told me that the he and his was sure that there is a quick uptrend is about to come. After the recent losses I wanted to quickliy regain some money. I reinvested the all my money in a CALL Warrant. The same day the SMI (Swiss Market Index) dropped 15%. Two days later the Warrants expired, 100% loss.

    All the money was lost in just 7 days. As a result of stupidity, fear, greed, impatience and haugthiness (don’t know if thats the correct word).

  48. Maria – thank you for your wonderful comment. I really appreciate it. I can see that you see the good in people. That is a noble talent. Well done to you.

  49. Alessio – Would be interesting for all concerned if you could run a more extensive Bio of your life and times, so to speak, as a trader etc.

    How did you start? where did you work before you became an independant? have you/do you trade other peoples money of just your own?

    Be a perfect time for you to get your real story out before the twisted… err twist it to suit their agendas… if you catch my drift 😉

    Best of British btw!

  50. Alessio do you think maybe you’ve just shown your poker hands to the world?

    Loved the interview but now you’ve challenged the proverbial smart money like Goldman to prop up the market

  51. Mr Rastani, your ideas and insights are fascinating, thank you for sharing them.

    With regard to the importance of share price trends and the dangers of trying to catch a falling knife, don’t you think that an overly pessimistic approach to shares with falling prices can lead to missing bargains? I remember that several fortunes were made by people buying stocks in the early 30’s at ludicrously low levels when everyone else was selling.

    At the moment there are several smaller natural resource companies that are looking very undervalued because of panic on the markets, even if their share prices fall some more in the short term, the fundamentals look so good that they seem a real buying opportunity. Do you really think that market trends trump fundamentals?

  52. great article…espcially i did same mistake in 2008. I invested 40k in the stock market in 2007 and it increased to 160k by 2008 and I knew most of the stocks were over-valued but I kept them as market was increasing day by day especially in the emerging markets.I knew in Jan, 2008 by my trading precitions that market will fall, but I decided to follow the sentiments of the people.Another reason, I dnt sell was due to the fact that I was gng back to univ in sept, so i thought if i sell stocks after march i will save more tax as i will be student.But markets crashed and my portflio cme to 30 k within 3 days.But now i just buy and sell shares when i get good profit.But to be honest, you need to risk of buying shares of a firm especially like Barclays when shares fall by doing analysis on various factors.In additon, markets cannot rise..its more like zig zag …2-3 years it will rise and then it wil fall..I guess best strategy is to wait when markets crash badly and invest in diversified porfolio.

  53. ha. HAH! I bought HIGH and sold low (to protect myself) after losing exactly half the value of my life savings. After deciding to fire my financial advisor I bought a few books, made a lot more mistakes, and got smarter. It’s hard work and time. xD

  54. Hi Alessio,

    What is your view on gold? I heard your interview in bbc radio but the anchor cut you off when you were saying how gold could behave .

    I am from India and i invested in a Alternative enery company(windmill) when it was trading at Rs 400 and then averaged out when the price was 101 and sold out when the price was Rs 62 after 2.5 years. After i cut my losses i lost around 70% of my investment, it came out that the company was facing huge loss of customer orders due to cracks in turbines and blades. today its tradin at Rs 37. Price of a stock changes first and news comes later.

    I am not a trader. A lot of players are bullish on precious metals so i would like to know if silver goes below 26.15 why would you stay bearish and for how long…??

    Because the money printing is going on and long term precious metals, in my opinion precious metals should rise.

    Also, please elaborate on hedging strategies that could be used to make money in the down market. I am studying put options now after seeing ur interview.:)) One query on them, what timeframe for expiry would you suggest for buying a put option. Is it better to buy puts on indexes or on stocks?

    And thank you very much for the guidance that you provide..

    With Regards,
    Anshuman, India

  55. Well, it’s not always a wrong thought to busey cheaper and sell higher. But the fundamental reasons to be right. Look at gold and silver, ik bought them when they crashed, because we all know that the currency crisis is going to be much worse. So it’s not just buying because it’s cheaper, but also because you’ve got to have a view on something.

  56. Mark, by all means use fundamentals if it helps you. But the problem with just using fundamentals and ignoring techncials is that it is similar to diagnosing a patient without taking his/her temperature. If the stock or commodity is falling, it does not matter if the fundamentals are good. That stock may well continue falling and falling until it causes you nothing but pain. But I appreciate your comment.

  57. Anshuman – firstly in regards Put options, I think it is best if I direct you to a really good book on that one which is “Options Made Easy” by G. Cohen which is still the leading authority on options. I will produce more articles on this soon. In regards gold and silver, we have to be cautious. At the moment both these metals are near support and if we do see some signs that they are about to reverse and head upwards, then yes I am going to get bullish on them. I would recommend building your positions slowly as that market turns in your favour (i.e. don’t suddenly buy a whole bunch of gold at once).

  58. Dgardner – I am sure it was a learning experience for you and having made similar mistakes years ago myself, we can all become better at what we do. Happy trading!

  59. Thanks for sharing this with me Deepak. As long as you have learn something from that, I am sure you’ve come out of it much stronger. Good for you.

  60. Simon – you’ve hit the nail on the head. The desire for making quick rewards can be extremely dangerous and which is why most traders like me spend a lot of time working on our psychology and discipline. Thanks for your comment. I am glad you shared your story with us.

  61. CH – yes I do consider technicals and price to take precedence over fundamentals. For me price is pure. It does not lie. However, anyone can fiddle things around with the fundamentals (p/e ratios and earnings reports etc.). Also I would focus on risks first before rewards. Thanks for commenting

  62. Yes, i agree. I always use technicals for timing and trends. If something is fundamental and technical strong, only then I’ll buy. Thats why i am shorting the markets, just like you 😉

  63. I think I”m more confused as to what to do now than before. One thing I do agree on is we’re heading for a dip/crash.

    for those of us w/401ks, is now the time to move the funds to more secure bond funds?
    for those of us with a few stocks, is now the time to buy some treasury bills?
    for those of us with a few thousand to invest, is now the time to buy dollars?

    I believe the answer to those questions is YES! what say you?


  64. Hi Alessio!
    Thanks for explaining. I then want to ask you one simple question: I have all my stocks still in the stockmarket in Israel , and one in Israel (Nobel Energy). Should I sell to not loose it all in your opinion? The money I have there is all I have got. I guess I was greedy, like you said:)

    Thank you for a good website!

  65. Allesio, please invest some monies I have as Socrates said “I am looking for an honest man”. . Thanks, Don Maines

  66. So are you suggesting that, someone with cash available to invest.. that they should hold it in cash for the foreseeable future?

  67. Allesio, thanks for your sharing your insite. Everything I have is in a money market fund. I have talked with two different advisors over the last year. Currently, one is telling me to invest in a mix of mostly corporate bond funds including a precious metal fund. Another advisor said don’t do anything right know, stay in cash. I am retired and living on a fixed income and need some income. The trouble is that I don’t know who to trust anymore or what I should do. Do you think corporate bond funds will survive either a depression or a recession? I was told they would. I loved hearing how to sell short, that is something the financial advisors will not discuss with me.

  68. Apparently, buying cheap is not a good strategy, But, in which cases is it actually a good idea to buy stocks when they are cheap? And, if doing it, when is it time to buy stocks without the risk of buying them at a far to expensive price?

  69. Almost forgot, thank you for a very useful and interesting blog,you have made me starting to think in new ways. Obviously, based on this post, I have already made a mistake but always good to learn strategies about to handle this sort of issues.

  70. Yes I have experience the FEAR/GREED factor, followed a teaser on
    AER Energy Resources – AERN lost a little money but still holding
    not much left in it to sell.

  71. Thanks Nowell. What does not kill us makes us stronger I guess. All a learning lesson. Cheers.

  72. The stock market is such a casino nowadays that it’s nice to find refuge in more reliable returns of Volatile yes, but not nearly as bad as equities.

  73. Hi Ashley – you are correct. Unfortunately a lot of people still use the markets a bit like a casino. That is not the way it should be (which is why 90% of traders lose). I am guessing you trade options?

  74. Wonderful, I agree with you on not getting conned with the buy low sell high crap. I do only commodities now after having been in stocks/shares in India for nearly 25 years. I do mostly day trading, and generally make a profit, bec I almost never carry anything over to the next day, I don’t find anything cheap or costly, it is just a notional feeling for me. What matters for me is whether the markets are headed up or down and which side I am on. I keep juggling between bullish/bearish depending on where the market is headed. That is it! Thanks for the wonderful blog Alessio, keep it going.

  75. Hey Rastiani you didnt read the whole article , She said “Be prepared. If we are indeed heading for another stock market crash, and I believe we are, then you need to take control of your emotions right now!

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