This piece covers Dan Rasmussen's research on investing during crises. He finds markets are more predictable in panics, with value stocks and high-yield bonds (now yielding ~6%) rebounding strongly. He warns against expensive US large-cap growth stocks (like Microsoft, Adobe) and private equity. Key takeaway: stay disciplined and buy oversold quality assets.
Dan Rasmussen (Verdad Capital) completed a quantitative study on investment strategies during market crises one month before the outbreak of the COVID crisis. The core argument is that market behavior during crises is more predictable rather than entirely random. The study found that during panic pe
Dan Rasmussen (Founder of Verdad Capital) completed a quantitative study on investment strategies during market crises one month before the COVID crisis erupted. The core argument is that market behavior during crises is more predictable than entirely random. The research finds that during panic periods, the value factor underperforms, but value stocks tend to outperform in the recovery phase following a crisis; the momentum factor is effective in the early stages of a crisis but carries high reversal risk in later stages; bond and credit markets provide diversification benefits during crises. Rasmussen emphasizes adopting a blended factor approach rather than pure index investing. Key conclusion: crises are typically short-lived (averaging about 1–2 years), and investors should remain disciplined, buying oversold assets—especially high-quality value stocks—during panic to maximize long-term returns.
Dan Rasmussen argues that market behavior during crises is more predictable than during bull markets. He draws an analogy from Tolstoy: "Happy families are all alike; every unhappy family is unhappy in its own way. In reality, the same holds true for bull and bear markets—bear markets are all alike, while every bull market is different."
Rasmussen explains that during bull markets, "capital is abundant, and many foolish ideas can secure funding," with seemingly poor valuations or low-quality companies being rescued by loose monetary policy and M&A activity. In crises, these "lifelines" disappear, and markets revert to fundamentals. He cites a study showing that Fama-French factors are 8 times more predictive during crises than in normal periods.
Specific data support:
Rasmussen emphasizes: "Even buying simple conditions during a crisis—positive net income and positive operating cash flow—nearly doubles returns."
Rasmussen points out that crisis durations vary significantly, but small-cap stocks have the most pronounced performance during the recovery phase. Measured from when high-yield spreads break above 650 basis points, the shortest crises last 1-3 months (e.g., 1987), while the longest exceed 12 months (2008).
He cites the 1929 Great Depression as a case study: "Large-cap stocks took 12 years to return to their 1929 highs, but small caps did so in just 4 years. From 1932 to 1936, small caps surged over 800%." This pattern has repeated across crises—"Every time the S&P 500 has fallen this much, small caps have led the rebound significantly, whether in small-cap value or small-cap growth."
For the bond market, Rasmussen introduces the concept of the "fool's yield": in normal times, there is a tipping point between bond yields and total returns, typically around the BB rating (just below investment grade). "In 2019, BB-rated bonds yielded about 4.5%. Any incremental yield above that was ultimately consumed by default losses—buying an 8% yielding bond delivered a real return of only 4%; buying a 10% yielding bond also returned 4%."
However, during a crisis, the dynamics shift: "Now is the time to move down from investment grade into high yield, from BB down to single B." Currently, the high-yield market offers yields of approximately 8%, with BB-rated bonds at about 6%. For pension funds targeting a 7% return, "this is a good time to buy high yield." Rasmussen adds: "In the 12-24 months following past crises, high-yield bond returns have actually outperformed large-cap stocks."
Rasmussen argues that the value factor is currently at a historically extreme position, akin to a "compressed spring." He acknowledges that the value factor performed poorly in the early stages of this crisis—"what was already losing money is now losing even more"—but historical data shows that the value factor has a 70%-80% win rate during crises.
Key valuation metrics:
Rasmussen responds to the "this time is different" skepticism: "The best argument is that today's growth companies are indeed of higher quality—Microsoft, Adobe, Mastercard, and others boast extremely high ROE and ROIC. In a world of zero interest rates and zero growth, these high-quality companies should be rewarded." However, he counters: "The analysis has already been fully priced in, even overpriced by 2-3 times. And the catalyst is the economic crisis we are currently in."
He warns of the two most dangerous areas:
1. U.S. large-cap growth stocks: "They account for a large proportion of most broad market indices, and their valuations are very, very expensive relative to history."
2. U.S. private equity: "Not only is it equally expensive, but it is also the most leveraged part of the U.S. market."
In contrast, "international markets have always been and remain relatively reasonably valued, even attractive. After a decade of underperformance internationally, perhaps this crisis will bring about a paradigm shift."
Rasmussen emphasizes that during crises, a multi-factor blended strategy should be adopted rather than a single factor. He compares investing to navigating between "Scylla (overvaluation) and Charybdis (bankruptcy risk)": "Do not overpay for something, and do not buy something that will go bankrupt."
Specific framework:
Rasmussen holds a nuanced view on the role of momentum during crises: "If there is a moment to slightly relax the avoidance of negative momentum, it is now. Because too many things are being sold purely due to a lack of liquidity." He cites data from 2009: from March 2009 to March 2010, stocks in the worst momentum decile rose by an average of 236%, despite having fallen 90% previously.
Rasmussen warns that the greatest danger during a crisis is being dominated by the voices of those who were "recently correct." By studying newspapers from past crises, he found: "The most bearish individuals suddenly receive all media attention because they were right. But they remain bearish—the person who sold stocks in January hasn't turned bullish; he tells you to keep selling because he was right the first time."
He cites Stanford professor Mordecai Kurz's theory of "rational beliefs": at any given moment, there exists a range of predictions that cannot be rationally falsified. For the current COVID-19 crisis, the prediction range for deaths spans from 200,000 to 20 million, and "no one can prove that 20 million is more reasonable than 200,000."
Rasmussen's final advice: "Now more than ever, it is essential to rely on data and base rates. Base rates very clearly indicate that now is a good buying opportunity. If not now (because the true bottom typically appears 3–6 months after panic begins), then the coming months will offer the best buying opportunity for stocks and bonds in a decade."
He cites historical facts: "100% of U.S. stock market panics have eventually returned to their previous highs. The market is highly resilient."
| Position | Guest Stance | Key Data |
|---|---|---|
| Small-Cap Value Stocks | Bullish | Rose 800% in 4 years after 1929; 71% win rate during crisis months |
| High-Yield Bonds (BB Rated) | Bullish | Current yield ~6%; returns outperform large-cap stocks 12-24 months post-crisis |
| High-Yield Bonds (Single B Rated) | Cautiously Bullish | Current yield ~8%; requires careful selection of high-quality issuers |
| US Large-Cap Growth Stocks (NASDAQ) | Risk Warning | Valuations at historically extreme highs; "priced for perfection" |
| US Private Equity | Risk Warning | Expensive valuations with highest leverage |
| International Stocks | Neutral to Positive | Relative valuations reasonable; may benefit from paradigm shift |
| Microsoft, Adobe, Mastercard | Risk Warning (Valuation Level) | High quality but valuation premium "overpriced by 2-3x" |
| Energy Stocks, Bank Stocks | Risk Warning | Constitute the "asset-heavy, low-growth" portion of the value benchmark |
1. "All bear markets are alike; each bull market is different" (Dan Rasmussen) — During crises, human behavior and psychology become more predictable, and the predictive power of Fama-French factors is eight times greater than in normal times.
2. "The Fool's Yield" rule (Dan Rasmussen) — In normal times, the BB-rated bond yield (approximately 4.5%) serves as the threshold; any higher yield is ultimately consumed by default losses. However, during a crisis, one should actively "reach down" to single-B rated bonds.
3. "Small caps rose 800% in the four years after 1929, while large caps took 12 years to break even" (Dan Rasmussen) — After every crisis, small caps significantly outperform, regardless of whether they are value or growth stocks.
4. "The most bearish person suddenly gets all the media attention because they were right — but they remain bearish" (Dan Rasmussen) — The most dangerous psychological trap during a crisis is being swayed by the voice of "the one who was recently right," rather than relying on data.
5. "100% of U.S. stock panics have eventually returned to their previous highs" (Dan Rasmussen) — The market is extremely resilient; now is the time to rely on base rates rather than narratives.
6. The two pillars of a multi-factor blended strategy (Dan Rasmussen) — "Scylla is overvaluation, Charybdis is bankruptcy risk"; the value factor avoids overvaluation, the quality factor avoids bankruptcy risk, and momentum serves as a risk mitigation tool.
7. "If there is ever a moment to slightly relax the aversion to negative momentum, it is now" (Dan Rasmussen) — In 2009, the worst momentum decile stocks rose 236% over the subsequent 12 months, despite having fallen 90% beforehand.
8. "The true bottom typically appears 3-6 months after the panic begins" (Dan Rasmussen) — Based on historical crisis data, now or in the coming months represents the best buying opportunity in a decade.