25 years ago today stock markets around the world crashed. Investors were shocked and billions of dollars wiped out.The crash actually started in Hong Kong and spread to Europe and then the United States and Canada. The Dow Jones dropped 508 points to 1738.74 losing 22.6%. It was called Black Monday and many investors, analysts and economists feared it was a repeat fo the crash of 1929. Indeed 33 eminent economists from around the world met in Washington DC in December 1987 and they predicted that the years to follow Black monday would be the worst since the 1930’s.
They were of course, wrong. Even with the crash of Black Monday the Dow ended 1987 on a positive note. It had started the year 1,897 and end 1987 at 1,939. It took two years for the Dow to regain the closing high of August 25, 1987 of 2,722 points.
The gentleman who had mentored me in the early 1970’s had passed away two years earlier. My mentor had steered me through the 1974 market crash by advising me to create a list of 10 large cap dividend paying stocks that I would love to own at very low prices. He said I should keep this and update it every 6 months. In 1974 I was a young investor and was shocked at the collapse of 50% in market valuations. To my surprise though, my mentor was delighted. He kept telling me that “firesales are the most fun to attend”. He then advised me to start buying some stocks and I remember we spent quite a few sessions reviewing my list and buying stocks. I thought I must be an idiot to be buying stocks when the world seemed to be falling apart. The oil embargo had us lining up to buy gasoline. Oil went through the roof as it rose to over $30 a barrel. Then there were all the rumblings of Nixon and the bombings of North Vietnam. The world seemed pretty desperate in my books. I questioned the sanity of my mentor but in the end he was right and I was wrong.
The world didn’t end and the stocks I bought doubled my portfolio. Before my mentor passed on he told me there would always be crashes of stocks. He had survived the crash of 1929 and had invested heavily in the 1930’s. He told me the problem with crashes is they are highly contagious. “Investors are always afraid”, he told. He advised me to keep my list of “firesale” companies and to review them every 6 months. Remove any I did not want and add new ones. He also is the one who taught me to keep cash always at the ready. “Hold back 30%” is what he had told me. “Keep it completely liquid and don’t worry about what you might not earn on it”, he had repeated. It was because it has never mattered what percent of return I get for my cash when it is not in use. When it is in use the returns are so high it really has never mattered whether I earn 2% or 5% on the cash sitting in a money market or t-bill account.
His advice has paid off handsomely in 1987, 1997, 1998, 2001, 2002-03, 2008-09 and the flash crash of 2010 and the summer of 2011.
There will always be market collapses. Above is the flash crash on the Dow Jones of May 6 2010.
Over the past few days I have read dozens of doom and gloom articles which does not help investors at all. It’s easy to be bearish and write “scary” predictions. Remember that when an analyst predicts a collapse of stock markets he will someday be right, but if you have your list of companies that you would love to own at firesale prices always at the ready, you will be unafraid to step in amid the panic and buy excellent companies at rock bottom prices.