What I learned from Black Monday in 1987

Recently, there was a very significant day in stock market history. Thirty-five years ago, October 19, 1987, was one of the most dramatic days of all time in the financial markets. The Dow Jones Industrial Average dropped 508 points, or 22.6%, that day. The Dow went from 2,246.74 to 1,738.74, the largest one-day percentage drop in history. It wiped out 14 months of gains in only a few hours. Black Monday destroyed $500 billion of stock values and $1 trillion worldwide.

By comparison, if a crash of that magnitude happened today, at current levels, it would be a drop of approximately 7,100 points—in one day! It would be the equivalent of wiping out close to $20 trillion in value, which is almost the total gross domestic product of the U.S.! Can you imagine the reaction if something like that happened today?

Fortunately, or unfortunately, I had a front-row seat to the whole meltdown. It really seemed like the end of the stock market and capitalism. I recall watching it, along with a number of other people, as it just went into free fall. We felt so helpless, and it was like watching a slow-motion train wreck.

We learned later that part of the problem was program trading by computers, and there was no mechanism in place on the exchanges at the time to pause periodically and give trades a chance to catch up. There was a non-stop avalanche of sell orders and no one stepping up to buy, so it just kept feeding on itself.

My goal here is not to share with you why the crash happened but what happened after. What investors did that day and the months after meant all the difference in their net worth over the next five to 10 years. Many people panicked and sold that day or within a few days after. Big mistake!

The Dow and the S&P 500 are up approximately 34 times from the October 19, 1987 bottom. At first, no one wanted to talk about stocks or have anything to do with the stock market. At the time, I lived in the San Francisco Bay area and had one of those personalized license plates on my car that read “MKTWZRD,” which stood for Market Wizard. Not that I thought I was any market wizard, but it was just a funny way of advertising what I did for a living. Boy, was that a mistake! For the next several weeks, I had people driving by me, honking their horns at me and shaking their fists, among other things. This was such a traumatic event that everyone was upset and angry. It’s not like I caused it, but my car tag seemed to just rub it in. I took off those plates and have never displayed any kind of personalized plate since.

One and a half years later, the Dow Jones had made a new high. But most investors were still too scared to buy stocks again. It’s really no surprise because the cycle is always the same: Fear overtakes greed, and people sell near the bottom. Then greed overtakes fear right before the next downturn. This cycle repeats every time.

I’ve seen it firsthand, investing through the last five bear markets over a 45-year career in the investment business. It has taught me that there is only one strategy to take when stocks are plunging. It’s something you don’t hear much about, yet it’s pretty simple.

1. Own high-quality businesses bought at bargain prices.
2. If you are fully invested, do nothing. If you’re not fully invested, there is no better time to buy.
3. Ignore the news headlines, and don’t waste your time trying to time the stock market bottom. Only God and liars can invest at the exact bottom.

Of course, this is just my opinion, and you need to decide for yourself based on your individual situation. Legendary investor Peter Lynch said, “Far more money has been lost by investors in preparing for corrections, or anticipating corrections than has been lost in the corrections themselves.”

I have no idea how long this bear market will last or when it will end. But if you can live through it, then you deserve the big returns stocks can generate in the aftermath. Thanks for reading.