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.
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!