25 years ago today the stock market
collapsed—and I mean collapsed in the full sense of the word: on Monday October
19, 1987 the Dow Jones Industrial Average fell 22.6%, or 508 points.
collapsed—and I mean collapsed in the full sense of the word: on Monday October
19, 1987 the Dow Jones Industrial Average fell 22.6%, or 508 points.
And while 508 points may not sound like much
these days, 22.6% into today’s equivalent is 3,116 points.
these days, 22.6% into today’s equivalent is 3,116 points.
3,116 points.
Get your mind around that, as
Warren Buffett would say.
Get your mind around that, as
Warren Buffett would say.
I have a hard time getting my own mind around that, and yet I was on Wall Street that day (figuratively speaking—I worked mid-town), at a money management firm
of which I have very fond memories. It
was a great shop, with a great client base (families mainly—this was in the
days before fund-of-funds, ETFs and all manner of dis-intermediaries between
investors and investments) and money managers with a real eye for investing in
companies (as opposed to buying stocks, which is an entirely different
mindset).
of which I have very fond memories. It
was a great shop, with a great client base (families mainly—this was in the
days before fund-of-funds, ETFs and all manner of dis-intermediaries between
investors and investments) and money managers with a real eye for investing in
companies (as opposed to buying stocks, which is an entirely different
mindset).
Every time I pitched an idea—I was an
analyst—one of the portfolio managers would start nodding and say, “Oh, I have
a client who used to compete with them,” or “One of my clients sold out to
those guys”…and then I would get a lesson in how that particular company actually
managed itself behind the façade of quarterly earnings and black-and-white SEC
filings.
analyst—one of the portfolio managers would start nodding and say, “Oh, I have
a client who used to compete with them,” or “One of my clients sold out to
those guys”…and then I would get a lesson in how that particular company actually
managed itself behind the façade of quarterly earnings and black-and-white SEC
filings.
It was a great shop.
Anyway, by the time Black Monday came, we’d
been getting strange vibes about the stresses building up in the market—not
because our clients were day-trading types who had been caught up in the pre-Crash
mania, but because they weren’t
day-trading types, and yet here we were a week or so before the collapse
getting hit with all manner of redemption requests.
been getting strange vibes about the stresses building up in the market—not
because our clients were day-trading types who had been caught up in the pre-Crash
mania, but because they weren’t
day-trading types, and yet here we were a week or so before the collapse
getting hit with all manner of redemption requests.
The pressure built so quickly that the Friday
before Black Monday I heard we’d been selling stocks overnight in Japan to raise
liquidity for somebody. And we weren’t a
“sell overnight in Japan”-type place.
before Black Monday I heard we’d been selling stocks overnight in Japan to raise
liquidity for somebody. And we weren’t a
“sell overnight in Japan”-type place.
I thought “Well if it’s this bad for our
clients, Fidelity must be a basket case.”
clients, Fidelity must be a basket case.”
So Friday afternoon I sat at the Quotron
machine (look it up, kids) and began hunting for the highest-multiple, most
consumer-sensitive stock I could find.
It turned out to be Home Depot, which was sort of the Lululemon of its
day.
machine (look it up, kids) and began hunting for the highest-multiple, most
consumer-sensitive stock I could find.
It turned out to be Home Depot, which was sort of the Lululemon of its
day.
And I shorted Home Depot. Not alot, but just enough to hedge my own
investment portfolio. Then I went home
for the weekend, which is when everything came unglued.
investment portfolio. Then I went home
for the weekend, which is when everything came unglued.
What I remember about Black Monday mainly was
how quiet it was (this was pre-CNBC, pre-Internet, pre-cell phones), at least for those of us in the business not screaming our guts out and waving tickets in a scrum on the floor of the NYSE, like the specialists trying to make markets that panic-stricken day.
Our trading room (not
a big one—we only had three traders) was more like a funeral parlor. Portfolio managers drifted in, arms crossed,
and looked over Roger or Donna or Mary’s shoulder at the screens, shook their
heads, muttered something like “What
is going on” and left the room to get
back to the calls from their clients who were asking the same thing.
how quiet it was (this was pre-CNBC, pre-Internet, pre-cell phones), at least for those of us in the business not screaming our guts out and waving tickets in a scrum on the floor of the NYSE, like the specialists trying to make markets that panic-stricken day.
Our trading room (not
a big one—we only had three traders) was more like a funeral parlor. Portfolio managers drifted in, arms crossed,
and looked over Roger or Donna or Mary’s shoulder at the screens, shook their
heads, muttered something like “What
is going on” and left the room to get
back to the calls from their clients who were asking the same thing.
I had lunch with another analyst at a
Japanese sushi place in mid-town—it was a nice break from what seemed like the
end of our world as we knew it—and tried to think through the implications,
secure in the knowledge that, however badly it all ended, I had shorted Home
Depot, so my own portfolio was hedged.
Japanese sushi place in mid-town—it was a nice break from what seemed like the
end of our world as we knew it—and tried to think through the implications,
secure in the knowledge that, however badly it all ended, I had shorted Home
Depot, so my own portfolio was hedged.
Otherwise, that day and the days after Black
Monday are a blur. NASDAQ broke
down—quotes didn’t mean anything—and the shock to the system seemed
irreparable. All manner of strategists
came through our offices over the next few weeks and months, trying to explain
what had happened and what it all meant.
Monday are a blur. NASDAQ broke
down—quotes didn’t mean anything—and the shock to the system seemed
irreparable. All manner of strategists
came through our offices over the next few weeks and months, trying to explain
what had happened and what it all meant.
The only one I remember—the only one who made
any sense—was Larry Kudlow. Yes, the
CNBC Larry Kudlow.
In those days Larry was
a Wall Street economist, and quite a good one. And
Larry sat at the head of our conference table with a group of stunned and scared portfolio managers and analysts, and he said, and I can still quote him because the sentence
was the only crisp, clear thing anybody said at the time: “What we had was a
good old-fashioned liquidity crisis. It
started with the Fed tightening and was precipitated by portfolio
insurance…”
any sense—was Larry Kudlow. Yes, the
CNBC Larry Kudlow.
In those days Larry was
a Wall Street economist, and quite a good one. And
Larry sat at the head of our conference table with a group of stunned and scared portfolio managers and analysts, and he said, and I can still quote him because the sentence
was the only crisp, clear thing anybody said at the time: “What we had was a
good old-fashioned liquidity crisis. It
started with the Fed tightening and was precipitated by portfolio
insurance…”
And he went on to explain why the Fed was doing
the right thing (easing like crazy) and the world would come out in good
shape. He was the only strategist who
said that, and even though most of us thought he was a cock-eyed optimist, it turned out he was the only strategist we met that fall who had it dead right.
the right thing (easing like crazy) and the world would come out in good
shape. He was the only strategist who
said that, and even though most of us thought he was a cock-eyed optimist, it turned out he was the only strategist we met that fall who had it dead right.
In any case, our firm did remarkably well
coming out of Black Monday. The day
after the crash, the principals had called a meeting and said to all us analysts, “Give us your single best company.”
And then they walked out of the room and bought each one of those stocks for the firm, at a time when everyone else on Wall Street was too scared to buy anything but hard liquor and a chaser.
coming out of Black Monday. The day
after the crash, the principals had called a meeting and said to all us analysts, “Give us your single best company.”
And then they walked out of the room and bought each one of those stocks for the firm, at a time when everyone else on Wall Street was too scared to buy anything but hard liquor and a chaser.
Me, I closed out my Home Depot short, feeling
pretty good about it. The stock fell 25%
on Black Monday and bottomed 30% off the price where I’d shorted it. I bought the stock back some time that week,
feeling pretty slick that I’d had the foresight to hedge myself by shorting one
of the most popular stocks of that era.
pretty good about it. The stock fell 25%
on Black Monday and bottomed 30% off the price where I’d shorted it. I bought the stock back some time that week,
feeling pretty slick that I’d had the foresight to hedge myself by shorting one
of the most popular stocks of that era.
Of course, Home Depot has come a long way
since then. Last night it closed at
$61.80.
since then. Last night it closed at
$61.80.
Where did I short it way back in October of
1987?
1987?
Well, I shorted it at the split-adjusted
equivalent of $0.70 a share, and bought it back at around $0.50 a share.
equivalent of $0.70 a share, and bought it back at around $0.50 a share.
Which means, genius that I am, I sold Home Depot for less than today’s
annual dividend of $1.16 a share.
annual dividend of $1.16 a share.
And that’s why, when I tell my grandchildren
the story of Black Monday, I’ll be leaving out the part about Home Depot.
the story of Black Monday, I’ll be leaving out the part about Home Depot.
Jeff Matthews
Author “Secrets in Plain
Sight: Business and Investing Secrets of Warren Buffett”
Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing,
2012) Available now at Amazon.com
2012) Available now at Amazon.com
© 2012 NotMakingThisUp,
LLC
LLC
The content contained in
this blog represents only the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and
clients advised by Mr. Matthews may hold either long or short positions in
securities of various companies discussed in the blog based upon Mr. Matthews’
recommendations. This commentary in no
way constitutes investment advice, and should never be relied on in making an
investment decision, ever. Also, this
blog is not a solicitation of business by Mr. Matthews: all inquiries will be
ignored. And if you think Mr. Matthews
is kidding about that, he is not. The
content herein is intended solely for the entertainment of the reader, and the
author.
this blog represents only the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and
clients advised by Mr. Matthews may hold either long or short positions in
securities of various companies discussed in the blog based upon Mr. Matthews’
recommendations. This commentary in no
way constitutes investment advice, and should never be relied on in making an
investment decision, ever. Also, this
blog is not a solicitation of business by Mr. Matthews: all inquiries will be
ignored. And if you think Mr. Matthews
is kidding about that, he is not. The
content herein is intended solely for the entertainment of the reader, and the
author.
