About 5:30 pm 30 years ago today, I was sitting in a Merrill Lynch conference room with about 25 stockbrokers, huddled around a small conference table, listening to some presumably wise man in New York on the squawk box. The brokers, practically elderly men already in their 50s, were mostly chain smokers – and they all looked panicked. One now-deceased gentleman at the table walked away before the conference call ended, saying “I’m done. The market is never coming back and I can’t take this any more.”
The Dow Jones Industrial Average had just dropped 508 points (23%) that day, or the equivalent of 5,200 points today. The Dow closed at 1738, after falling from 2,200 only two months earlier. Although I had been in the investment business for less than two years, I was a student of economic history. I had studied the Crash of 1929 and the 16-year flat market that begain in 1966. Unlike those really old, scared men at Merrill Lynch, however, I was too naïve to panic – despite having a new wife, a new house, a new mortgage and a new little fru-fru dog.
Today’s students of economic history understand that The Crash of 1987 was my generation’s Crash of 1929. Outstanding students, however, know that the U.S. stock market actually increased during calendar year 1987. The crash was effectively a two-month event.
One of my funnier memories from that week was an on-air discussion between CNN/fn anchor Lou Dobbs and correspondent Dan Dorfman. (CNN/fn was CNN/financial news; CNBC had not yet been invented.) Dorfman reported that he had spoken with a number of traders after the close and had one thing to report. “Lou, from here I can guarantee that the market is going up, up, up.” This was Friday, October 16th, the trading day before the 508 point collapse on Monday. Poor Dan.
I learned a number of lessons from that 1987 crash:
- The stock market can remain irrationally priced for a long time, but eventually corrects.
- Investors should always have a “crash shopping list.”
- Computers do not reduce risk or create value; they just speed things up.
- Broad diversification around the world provides little protection; when the U.S. market cratered in 1987, so did the markets in Asia, Europe and South America.
- When markets panic, participants sell indiscriminately. This creates massive opportunity for people who can differentiate companies based on their qualities.
- Borrowing money to buy stocks is infinitely more risky than borrowing to buy a house. The bank can’t call my loan simply because real estate prices decline.
Looking back, however, I realize that the most important thing I learned from the Crash of 1987 is how quickly thirty years passes.
In the 1980s, anyone with money in stocks tuned to his or her local PBS station on Friday night to watch Louis Rukeyser’s Wall Street Week. Here are three links to the show on the Friday evening following the Crash. I highly recommend them.