Happy 20th Anniversary!
20 years ago today there was a panic and dread that swept Wall Street like no one had seen in a generation. It proved to be a turning point in many peoples’ lives, including my own. I’ll let you do your own research as to the data from that time, just know that reviewing it still makes my heart race.
October 19th was a Monday in 1987. There had been some stinky weeks during September and October ahead of Black Monday. The markets had peaked in July and been somewhat stagnant in August. And while Oct. 19th was statistically extraordinary it wasn’t a one day event. Pain and suffering continued until the markets finally capitulated in early December.
I was on the phone with my brother that AM. He was employed with Paine Webber at the time. He and I compared notes. I had a 30 min. delayed ticker service in my office that showed on my 8087 IBM personal computer (with color monitor, 64K of ram and a 10 meg hard drive!) My brother had what was considered “real time” service in his office. At one point that 30 minutes delay showed the DOW being 200 points different! Well, 200 points doesn’t sound like much on 14,000, but it was tremendous when based upon around 2000 at the time, it was tremendous. Never before had there been something that happened this quickly. My brother was no more confident of the Dow 1800 he was seeing than I was of the Dow 2000 I was seeing. The target was moving so fast that nobody really knew what was the reality.
Paine Webber would only accept “market orders” for that day and several to follow. Since nobody could get a reliable quote on ANYTHING there was no way to give rational advice to clients. Nobody would even think of using a Stop Loss since there was no way to gauge just what the results might be. Our phone calls were interrupted several times that day as his clients called him for advice. He kept repeating, “Don’t do ANYTHING. This, too shall pass.” Many of his clients were Florida retirees. He helped them to establish conservative accounts loaded up at the time with very high yielding bonds, CDs and other vehicles which had been paying “once in a lifetime” dividends. So, most of his clients were in good shape and really needn’t do anything. Still fear was pervasive.
I’d read Mr. Lichello’s book sometime in ‘85 or ‘86 and had played with the AIM model for almost a year before trying to do some “real time” modeling. On 13 column paper in January of 1987 I started to track my actual portfolio using Mr. L’s model (by the book) while I continued with my own seat-of-the-pants AIMlike activities. I was actually ahead of Mr. L’s AIM at mid-Summer. That was understandable as the market had been rising steadily. I had more cash on hand than AIM, I had more realized gains than AIM. Obviously I had a superior system.
I didn’t do much in August. Neither did Mr. L’s model. I started to buy some of my favorites in the September decline. I continued buying each week leading up to Black Monday. I’d gone from around 50% overall cash to something less than 45% BEFORE Oct. 19th. I was smug, too. Mr. Lichello’s model hadn’t spent a dime yet. Obviously his system was flawed. It didn’t sell enough during the rise and now it was stuck not buying during a mild decline. I was beginning to think the AIM method was as dumb as the title of the book.
There had been some warning flags run up the financial poles. Talk of over-valuation were dismissed as being ‘old school’ and that things were well under control. Trading was robust on Wall Street with new systems allowing faster and more efficient trading. Bid/Ask ranges were starting to shrink with these new systems in place. So, even though there were Gale Warning flags up, nobody was paying much attention. Those who tell you they were out of the market before Black Monday are telling you that they know the true meaning of Dumb Luck!
Even with my own very contrary model I was still about 50% exposed at the market peak. By the Friday before the 19th I was around 60% invested. When the ticker started to crash I just held my breath. The next day I went to work on my account. I looked for the lowest P/Es, highest dividends and best growth potential of the stocks I owned and was watching and bought heavily. I continued buying heavily each week as prices continued to descend on all but a handful of stocks. By late November my cash was almost gone and I was being very selective about where it was to be applied.
Well, what had happened during all this excitement with my AIM model? During November I took time to update it. After Oct. 19th AIM did start to buy. It used some spare change and dipped into the decline for its piece. It did more, heavier buying through November. It did its most serious buying right to the bottom on Dec. 4th of that year when AIM ran out of cash. I ran out of cash at the same time. Hmmmmmmm.
What was the difference? I’d spent the heaviest at the beginning of the decline and AIM had done the opposite in doing only light buying. When I was getting thin on cash near the bottom and was spending only the small amount of cash that was left, AIM was spending the heaviest with the deepest discounts.
It turned out that Mr. Lichello’s model was a “proportional” device when buying and selling. Small moves, small trades. Huge moves, huge trades. Mine was nearly the polar opposite. AIM turned out to be far superior on the Purchasing side, not the sales side. For a guy who’d spent his entire life in sales, this should have been obvious, but instead is was a revelation. Now I knew what it was like to sit on the Purchasing Agent’s side of the desk. I gained respect for those with whom I’d worked in the past. Of course AIM's Hold Zone was also larger than mine. This prevented premature use of the cash reserves in AIM, while I was busy wasting mine for a month before the "crash."
A month after the market bottomed I converted all of my investments to the AIM model and, other than some tweaking along the way, it’s been the business model that has run the show since January of 1988. My Gut Wrench still hangs there on the wall to remind me of how it felt that day, but it is rarely used. It’s there next to the worthless stock certificates I use to keep myself humble. Those certificates are worth a lot in experience if not in monetary value.
So, I wish you all a happy Anniversary and welcome anyone else’s stories about October 19, 1987.
Best regards, Tom |
