My Recollections from Black Friday, 1987

I’ll never forget that day. The way the wind rustled through my hair, portending a storm coming that I could never have imagined. I had my bookbag on my back, headed to Ms Mutnik’s 4th grade class that morning. Little did I know that things would never be the same. Later that afternoon, I can remember drinking Dr Pepper and watching Michael Jackson’s new video for Bad on MTV. Then I switched over for the Disney bloc of after school shows. DuckTales. Gummi Bears. He-Man was on the other station but I saw that one already. It would prove to be a day that would forever change our lives forever and ever.

Oh shut the f**k up already.

October 1987 doesn’t even show up on a monthly chart. I was ten years old, and sure, I didn’t lose any money that day but I’m sure my dad did. And you know what? It didn’t matter, the market came back within weeks – WEEKS – and had no more long-lasting impact on the economy than the May 2010 flash crash, essentially zero impact. There was no accompanying recession leading to the crash or following it. Everyone had a job and commerce was booming all across the country. So Eastman Kodak went down 12 points, BFD.

The Crash of 1987 is one of the biggest non-event events of all time. It is important only insofar as:

1. It provides us with the lesson that the stock market and the economy don’t always move in lockstep

2. It is a reminder that any market sell-offs of greater than 20% must be bought immediately, blindly and without hesitation, regardless of how much worse it seems things may get.

3. The newly-installed Fed Chairman Alan Greenspan learned of the full extent of his powers over the asset markets – slashing rates to ultra-low levels to support the stock market. Unfortunately, he came away with a very wrong idea about the Fed’s role. He would henceforth become the Bubble-Blower in Chief, always ready with easy money the minute the stock market got in trouble. When we tired of one bubble, he simply gave us a new one. The roots of this lay in his apotheosis from central banker to godlike hero figure in the wake of the ’87 crash. This will come into play in a major way down the road…

4. The biggest parallel between then and now is that it has warped investor’s minds in terms of what matters. Jeff Miller explains why we’re seeing an echo of this now in the post-2008 era:

Simply put, the crash destroyed objective analysis for years.

This most important lesson of the Crash is not commonly understood.  For the next few  years, any stock system, whether based on fundamentals, technicals, or a computer program, had an acid test:

Did it call the crash?

We saw dozens of pitches.  No one even bothered with a method that did not include a successful “crash call.”  The event was so important, and had such a great impact on results, that you could not make a persuasive case for a system that did not have a “tweak” that would have predicted the crash.

Similarly, analysts who had given warnings were celebrated as heroes.  This turned out to be fifteen minutes of fame for some.

This final lesson is probably the most important, and the most difficult to understand.  Excessive emphasis on the “crash call” warped the thinking of portfolio managers and individual investors alike.  The life-changing events from 25 years ago punished some of the smartest traders and rewarded some of the, ahem, least skilled who happened to have the right position for the wrong reason.

Those who took the wrong lessons from this got to double down in lost opportunity.  They followed the wrong gurus and the wrong systems for many years thereafter.  They never recovered.

2008 is an echo of 1987.  Another generation of investors may be lost.

I think other than those four points, the fetishization of a relatively minor, short-term event is a bit overdone. Especially for traders and investors of my generation who have been through the 80% slow-motion Nasdaq crash of 2000 – 2002, which was punctuated by Enron, Worldcom and 9/11.  That ’87 sh*t is a joke compared to that. And obviously 2008 is, well, 2008. Nuff said.

So pass the Dr Pepper and that pouch of strawberry Big League Chew, I think the Cosby Show is coming on.

Read Also:

The Business Insider, 1987 (TRB)

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