Yes, I was there – Front row seat.
I was working at the head office of Wood Gundy, top floor of Royal Trust Tower. In one day, Monday, October 19th the Dow Jones Industrial Index (better known as “the Dow”) fell 508 points or 22.61%. The TSE 300, (Canadian Index) fell 22.5%.
Here is the daily line chart of the Dow from mid-June 1987 to January 1988.
The comical part of the day, I can remember vividly, sales assistants and fellow stockbrokers loudly asking anyone whether we were down 250 or 400 points on the Dow as they whispered the result to concerned clients. Our quote machines at the time were CMQ machines, which only had 2 digits left of the decimal point for any change in the index during the day. Talk about technology not keeping up with financial markets!
For what’s it worth here are my lessons learned, 25 years ago.
1. From the bottom of this day, the Dow is up almost 700% over the last 25 years. Like other crashes which I experienced since the ’87 crash, there was talk of the coming depression. There was talk of America having seen its best days. I remember subsequent to the ’87 crash Japan was going to eat America’s lunch. The Yen was going to replace the US dollar as the reserve currency of the world. America still stands and seems to be better off not only financially in spite of these crashes but stronger in character as a result.
2. Always buy quality companies. Companies that reside in the S&P 100 and the S&P/TSX 60 should make up the bulk of your portfolio with reasonable valuations. Investors who get wiped out are ones who invest in low quality companies with high valuations. Story stocks usually go to zero.
3. Before the Crash of ’87, everyone, and I mean everyone was on margin. Why? The first two-thirds of 1987 equity markets, both Wall Street and Bay Street were on fire! From the beginning of the year to mid-August, the Dow rallied 43% – Greed was in full swing. The combination of story stocks and leverage was a sad recipe for anyone involved. Anyone who lived through the crash learned leverage and the stock market was a two edged sword and should be respected and if used, used judiciously. Blue chip stocks were no protection to anyone who used maximum leverage.
Yes, these are rather simplistic lessons. The best lessons in life or career learning often are. I was 28 years old at the time, almost two years in the business before the Crash of ’87, and certainly one day I will never forget.