Black Monday - October 19, 1987....................
Here's what Wikipedia has to say:
en.wikipedia.org
Black Monday is the name commonly attached to the global, sudden, severe, and largely unexpected[1] stock market crash on October 19, 1987. In Australia and New Zealand, the day is also referred to as Black Tuesday because of the time zone difference from the United States.
All of the twenty-three major world markets experienced a sharp decline in October 1987. When measured in United States dollars, eight markets declined by 20 to 29%, three by 30 to 39% (Malaysia, Mexico and New Zealand), and three by more than 40% (Hong Kong, Australia and Singapore).[2][A] The least affected was Austria (a fall of 11.4%) while the most affected was Hong Kong with a drop of 45.8%. Out of twenty-three major industrial countries, nineteen had a decline greater than 20%.[3] Worldwide losses were estimated at US$1.7 trillion.[4] The severity of the crash sparked fears of extended economic instability[5] or even a reprise of the Great Depression.[6]
The degree to which the stock market crashes spread to the wider economy (the "real economy") was directly related to the monetary policy each nation pursued in response. The central banks of the United States, West Germany and Japan provided market liquidity to prevent debt defaults among financial institutions, and the impact on the real economy was relatively limited and short-lived. However, refusal to loosen monetary policy by the Reserve Bank of New Zealand had sharply negative and relatively long-term consequences for both financial markets and the real economy in New Zealand.[7]
The crash of 1987 also altered implied volatility patterns that arise in pricing financial options. Equity options traded in American markets did not show a volatility smile before the crash but began showing one afterward.[8]
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My personal recollections from that day were that my 20 Minute Delayed ticker signal was way off from what was "real time" on quotes. The reason I know this is I was on the phone with my brother that day and he was with Paine Webber at the time. I was seeing the Dow 30 at around 2000 where he was seeing around 1800 at the same time. That means there was around a 10% difference between what I was seeing and his quote service was showing - and that was just 20 minutes differential! It was a tough day, for certain. Paine Webber would only accept Market Orders as even they couldn't get a solid quote on any issue because of the rapidly changing share prices.
Because of the circumstances, if investors wanted to sell, they had to take what the market would give them when their order was executed. The backlog of orders was so massive compared to average execution time that it would sometimes take over an hour to find out at what price one's market order was filled. Usually the news wasn't very encouraging for sellers. One thought one was getting about one price but the executed trade was sometimes 10% to 30% below what was expected.
Talk about a MAALOX Moment!
I'd found Mr. Lichello's AIM book in 1986 and read it. I started modeling my portfolio of stocks with AIM as a test starting in January of 1987. By summer my own trading had made more money than AIM mainly because I was far more heavily invested. After the August peak, the markets started to unwind a bit. I'd raised cash in an AIM-like fashion during the year, but had no where near what AIM would have done with my portfolio. So, I put some of that cash to work in Sept and then more in early October. Meanwhile AIM spent NOTHING.
I'd burned a sizable percent of my cash by the 16th of October and was caught flat footed on the 19th. In mid 1986 I'd quit my day job to become a full time private investor. The market was my source of income for living expenses. I was not having a good day! I continued to buy on Tuesday using a "What's dropped the Most" selection process of my current stock holdings. Deepest discounts got the most cash.
Mr. Lichello's AIM finally loosened its purse strings and got out change and bought some stocks. I'd already blown most of my cash. The markets finally bottomed in early December when I was using what change I could find under seat cushions to continue buying. AIM, on the other hand, was throwing fist-fulls of cash at the market just as the bottom arrived.
AIM and I both ran out of cash at the same time. However, AIM did its heaviest buying right at the bottom while I'd been a far less successful purchasing agent, buying way too much way too soon. AIM showed a significantly better average cost/share through this period than my own home grown trading. As it turned out AIM would also have recovered faster as the markets turned upward.
AIM has raised more cash during the year as prices soared. AIM had waited until the real discounts arrived before it spent any cash. AIM bought heavier and heavier as the market discounts increased. AIM exhausted its cash just as the markets bottomed.
I'd started buying shares back less than a month after the August peak and spent way too much at prices that weren't much of a discount compared to what came later. AIM was good at selling for profit and far better at being a frugal purchasing agent. Starting January 1st of 1988 I took all my stocks and turned them all over to AIM. It took some effort at first. I had to come up with my average costs on each holding to come up with a Portfolio Control value. That took some bookkeeping. I then divided up the pool of stocks somewhat by industry and ended up with several AIM engines, each with 4 or more individual stocks included. Most of the individual positions were too small to exist as AIM holdings on their own. Grouping them by industry got the total value to manageable sizes for AIM. There was even an "And Others" group of stocks that really didn't fit any category but were too small a holding to manage individually.
I've been very pleased with AIM's overall management ever since. I was lucky to have stumbled across the "How To" book when I did. A good friend, Bob Hamilton, was instrumental in my finding Mr. Lichello's method. He's read an article with a title something like "The Ever Liquid Portfolio" which talked about using cash as a hedge for one's portfolio. In that article it mentioned Mr. Lichello's book as a reference. Bob had been a neighbor, and a few years older than me when I was growing up. I'd become re-acquainted with him at his brother's wedding a couple of years before the Crash. I'd told him what I was doing which was seat-of-the-pants AIMing for lack of a better description. He said he'd read about such ideas and was kind enough to send me several titles and publications. I probably wouldn't have found Mr. Lichello's book otherwise.
Anyway, Happy Black Monday Anniversary!
Best wishes,
OAG Tom |
