Monday, October 20, 2014

Putting the Current Stock Market's Recent Fall in Perspective by Remembering Black Monday, 1987 ... When the Stock Market Really Crashed

October 19, 1987 --- 27 years and one day ago --- was an unforgettable one. The stock market crashed and prices fell by an astounding 22% in one single day.

I remember it well. It was an absolute disaster.

But what has happened to share prices and dividend growth in the years since then should be remembered clearly as well. Doing so will help us gain and maintain a proper perspective that what happens to market prices in the short run matters little to what happens over the long haul.

On that October Monday in 1987, the Dow fell more than 500 points, or 22%, and closed well below 2,000 after having recently reached an all time record high of 2,722 on August 25. And last Friday it closed at 16,380. From less than 2,000 to more than 16,000 in 27 years. Three doubles in 27 years, not counting dividends. Now that's perspective!

So let's keep firmly in mind the value investor's mantra and internalize that while in the short run the market is like a voting machine, in the long run it's more like a weighing machine.

And for individual investors, what really matters are the long term sales and earnings performances of blue chip companies, and not the whims of short term market traders.

Stated another way, on a daily, weekly, monthly and even annual basis, stock prices will often fluctuate wildly and sometimes in a violent downward way. But over the long haul, shares of successful companies inevitably will rise and more than offset inflation by a considerable amount.

But now let's remember that scary day in October 1987.

Markets not looking to repeat Black Monday recalls that dreadful day and helps place it in its proper perspective:

"Remember what you were doing 27 years and one day ago? . . .

Of course, it was Black Monday. Destroyer of markets. Creator of ulcers. Wrecker of careers, crusher of dreams, and threat to the world as we knew it. Stocks plunged 22% in their worst showing of all time and doomsday scenarios were almost realized. “It was an incredible time and the financial system was within hours (and a few phone calls) of an absolute collapse. It was a time I’ll never forget,” wrote Art Cashin of UBS in a great color piece on CNBC over the weekend.

David Rosenberg won’t forget it either, and he offered up an even bleaker assessment in a recent conversation with Barry Ritholtz. He said people actually thought the world was ending.

“I’ve been through the savings and loan crisis. I’ve been through what happened in 1994, the tech wreck,” he said. “I was there on Wall Street between New Century Financial, and Bear Stearns, and Lehman, and AIG, but I’ll tell you something: the palpable fear, there was nothing like October 19, 1987.”

It’s the specter of those kinds of days that has investors on edge when the market starts going haywire like it has in recent sessions. Every whiff of a triple-digit drops feels dangerously close to turning in to something a lot more harmful. But it’s just not happening. The rebounds are still there. Friday was just the latest example of the safety net investors keep providing."

Summing Up

We older individual investors remember the events of October, 1987 very well.

And successful long term oriented individual investors didn't panic and sell back then.

And we won't now. Nor will we in the future either.

But for any short term traders out there, remember that the "vote" may be against you.

Here's my take --- Don't take that short term risk. Don't play the market. Invest in it or stay away from it.

Thanks. Bob.

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