The Dead Cat Bounce

by | Aug 17, 2023 | Uncategorized

The Dead Cat Bounce is a phenomenon that occurs in real estate and stock markets at the outset of a downturn. It comes from an old Wall Street saying about a falling market: “even a dead cat will bounce if it falls from a great height.

Investors who’ve been through multiple cycles are familiar with the Dead Cat Bounce, which catches shrewd, experienced investors, as well as newbies.

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HOW THE DEAD CAT BOUNCE WORKS

At the end of a boom market –like the one we’ve experienced this past decade –when prices are at all-time highs, many investors sense the market is overheating, and due for a correction.

Many stop investing. They sit on the sidelines, hording cash, waiting for the market to correct so they can jump back in, and buy the dip.

I did this in 2006! I saw trouble brewing. Deals no longer made sense. So I waited, watched, and built up cash ready to take advantage of a correction.

Pretty savvy, right?

It came in 2008. The market slid, 5%, 10%, then 15%… investors like me were watching closely from the sidelines, ready to deploy. When it had dropped 20%, the slide paused, then prices started climbing again.

That was my time to jump in! I did! I bought a 16-unit apartment building at a 20% discount, and watched prices tick back upward again. I had played it brilliantly!

But then, to my dismay, prices slid downward again… and kept sliding! What was happening?

What happened is I had gotten lured into a Dead Cat Bounce!

HERE’S HOW IT WORKS:

When stock or real estate markets are overheated, a lot of smart investors pull out, sit on the sidelines and horde cash, awaiting the correction.

When the market corrects 15% or so, a wave of investors jump in, causing an uptick in sales activity and pricing. But it’s NOT a tru recovery – just a wave of sidelined investors like me, who jumped in to lock in a healthy 15% discount!

Unfortunately, neither the housing market or the economy had worked through its issues — we had 3 more years of recession before that occurred.

That’s how I learned about the Dead Cat Bounce!

How can you learn from this?

Beware of a false recovery. Know that you exist in an ecosystem of investors, and their behavior, their psychology, can trick you. Most of all, be patient coming out of a downturn. Dip your toe in a bit before making major investments, so that you don’t get lured by a dead cat bounce!