October 18, 2007

YOU HAVE TO BE WICKED SMART TO MISS THE MAIN LESSON:

Lessons From the '87 Crash (Robert J. Samuelson, October 10, 2007, Washington Post)

The stock market crash of 1987 was horrifying even to Americans who weren't shareholders. On Oct. 19, the Dow Jones industrial average dropped 508 points, which was 22.6 percent and nearly twice the largest one-day decline during the 1929 crash. A comparable free fall today would be almost 3,200 points. Twenty years later, the crash of 1987 has changed the way we think. It has stripped us of the illusion that financial panics are a thing of the past. They remain a clear and present danger for the economy.

Actually, it didn't even change the way most of us think even as it was happening, nevermind now that it's either forgotten or remembered as proving what we thought then: buy on the dips. It was only computers and brights who panicked, Small Stockholders Again Refuse to Panic (DAVID BARBOZA, 8/06/88):
Jean Taranto isn't the kind who frets over a gyrating stock market. Prices go up and down, sometimes violently, but the American economy appears to be as strong as ever, she says. All that is to say that the stock market selloff Tuesday, which saw the Dow Jones industrial average plunge 299.43 points, is just one of the things investors must get used to.

''It's nothing to get desperate about,'' said Ms. Taranto, a Brooklyn teacher. ''The news people are making it sound like a catastrophe. But I have a lot of telephone stocks, and my stocks did O.K.''

That attitude, one of staying the course -- investing for the long term and remaining loyal to one of the greatest bull markets in history -- has time and again guided investors through the bumps and bruises of Wall Street trading in the 1990's. [...]

And in interviews with smaller investors around the country, many of whom have weathered sharp declines, the attitude is: the market will come back. ''I'm going to stay the course,'' said Daniel Saltzberg, 75, a retail clothing consultant. ''This market has to go up to at least 10,000. The economy is great. And where else will capital go?''

Mr. Saltzberg and others point to events last summer. A sharp market downturn began in August with a currency crisis in Southeast Asia, punishing stock prices, and this set the stage for the fierce selloff on Oct. 27, when the Dow Jones industrial average dropped 554 points, or 7.2 percent, in one day. (The market slowly recovered, and went on to gain more than 30 percent in less than a year.) [...]

Still, the knowledge that stock prices can go through violent swings, and still move higher from year to year, may be comforting investors who believe they can ride out the latest downturn. ''I'm not that concerned,'' said Theodore Garner, 48, a financial auditor in Portland, Ore. ''I've been in the market for 10 or 12 years, and I'm not going to take money out for another 10 years; so it doesn't bother me much. The gains from the mid-1980's have grown so much that it doesn't matter if the Dow slips back down to 7,000.''

Mr. Garner is not alone. A nationwide poll released Monday said it would take an ''unprecedented market drop'' of about 1,000 points in a single day to fully shake the confidence of small investors. [...]

''I still think the psychology of the small and medium investor is buy on the dips,'' said Jeremy J. Siegel, a professor at the Wharton School of the University of Pennsylvania and author of ''Stocks for the Long Run.''

Posted by Orrin Judd at October 18, 2007 7:52 AM
Comments

Okay, is the use of "wicked" a North Eastern thing? Had a friend in college from Mass. and she described a good idea as "wicked cool".

Posted by: Jay at October 18, 2007 9:31 AM

Tres Yankee.

Posted by: oj at October 18, 2007 10:51 AM

We opened our doors as financial advisers (Brouwer & Janachowski)in 1987, a few months before the October Crash. Overall, our clients handled it well, however there was a wide disparity in how they viewed it.

We had clients who viewed it as the buying opportunity of a lifetime and others who were petrified of a descent in the next Great Depression.

Because it all happened on one day, I think it was easier to look forward and move on [no pun intended]. We took the next morning's headline -- Dow Drops 508 Points -- framed it and put in on the wall of our conference room as a perennial reminder.

The market moved up later that week, but it retested the lows in December. However, 1988 was a very good year as was 1989.

I was also writing my first investment book that year and I had to do a fair amount of rewriting in order to include such a significant event. All in all, it was a memorable year.

www.fundmasteryblog.com

Posted by: Kurt Brouwer at October 18, 2007 12:20 PM
« THE INCREDIBLE DISAPPEARING FRONT RUNNER: | Main | LAST WAVE: »