‘80s market lessons are still in style

David MoonBlog

In 1987 I had been in the investment business less than two years. My wife and I, fresh out of college, purchased our first home. Her job paid more than mine, even with my fancy UT MBA.

Three degrees, two jobs, one little dog and one little mortgage. Life was easy.

Then on October 19 of that idyllic year, the Dow Jones Industrial Average dropped 508 points, which is the percentage equivalent of a 3,100 point drop today.

But in 1987, that 500 point drop was only half of the story. In the two months prior to that record decline, the Dow dropped from 2,700 to 2,200, before falling another 500 points to almost 1,700 on that Black Monday.

To fairly compare 2014 to 1987, we would first have to imagine that the Dow had dropped 3,100 points from August until mid-October of this year, then dropped another 3,100 points today.

That makes last week not seem so dramatic.

Even being poor, young and naïve (or maybe because of it), I learned a few timeless lessons from my generation’s Crash.

When someone tries to convince you they have a magic plan, program or idea, have them explain it to you in two sentences. If it doesn’t immediately make sense, then it probably doesn’t make sense.

Good investors separate their emotions from their money—which is much easier to do if you don’t have any money.

Twenty-five years passes very, very quickly. I mean, 27 years.

The stock market can remain irrationally priced for a long time, but eventually corrects.

If you are under the age of fifty or fifty-five, welcome flash crashes as buying opportunities.

To take advantage of sudden price drops, you must always maintain a “crash shopping list.” These are stocks you would be happy to buy if their prices would only decline.

If any of the stocks on your crash shopping list decline to the price at which you would be willing to buy them, buy them. Don’t try to predict how far the market might drop or when it might reverse course.

Computers do not reduce risk or create value. They merely speed things up.

Broad diversification around the world is merely monetary masturbation. Stock markets around the world are highly correlated. When the US 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.

Being old and wearing an expensive suit does not guarantee competence. In 1987 I saw a lot of stockbrokers panic. Some of them were elderly, perhaps even into their 50s. I’m guessing their mortgages were bigger than mine.