HISTORY LESSONS
Barron's this Saturday has a must-read cover story titled "Black Monday: 20 years later, can it happen again?", for anyone with even a casual interest in the stock market. Here's a reminder to what happened back then and why it's still such an exception despite this year's market volatility here and abroad:
"The Dow's drop on Oct. 19, 1987, was unprecedented, and hasn't come close to being equaled since then.
The largest percentage decline in the current decade was 7.1% on Sept. 17, 2001, and the biggest drop in the past two years was 3.3% on Feb. 27, 2007. Even the historic 1929 crash, while deeper, broader and longer-lasting, didn't produce a one-day downdraft as vicious as 1987 did. The Great Crash included a 12.8% one-day loss on Oct. 28, 1929, followed by an 11.7% slide the following day and one of 9.9% on Nov. 6. So, the 22.6% drop 20 years ago was truly a statistical outlier."
It was a very different time as Barron's reminds us, in terms of how relatively limited the tools investors had at their disposal:
"...the New York Stock Exchange was so swamped with orders that some trades couldn't be completed for hours. Often, it was even unclear whose orders were being filled when trades did get done.
Computer systems sophisticated enough to smoothly handle trades and record-keeping were only beginning to be used by the markets in 1987. Information also was less available to investors than it is today. The Internet didn't exist, and cable TV wasn't widespread. There was no CNBC or Bloomberg Radio."
As someone who had a ring-side seat on the Equities trading floors of Goldman Sachs in downtown New York during the Crash, I remember vividly the environment described in the article.
I was only five years into a Wall Street career at the firm, and in many ways probably under-appreciated the magnitude of what was going on relative to the veterans I was listening to in the post-crash conference calls after the markets mercifully closed.
The Barron's piece (Part 1 and Part II) by Andrew Bary, does a comprehensive job analyzing the current environment here and abroad, for clues on 
what might go wrong the next time that could lead to something like this again.
And despite the common-sense view of the professionals that these things are "100-year" statistical anomalies, it pays to study and think about these things, just in case.
The biggest reason is that such moments also provide historic opportunities for investments, as the adjacent chart of the market since the '87 Crash illustrates.
Happy reading.
Mike,
If you recall it was program insurance that was partly to blame in 87. As the market fell, the programs shorted S&P futures contracts, driving the market down even further. The trade halts didn't help either.
I also remember how my colleague's Australian gold stocks suddenly became totally illiquid
with zero bids. Marking the portfolio to market was a joke for these stocks.
IMO nothing much has changed. LTCM showed that with a vengeance in 1998. The sub-prime mess today is clearly causing illiquidity concerns today, and I wouldn't be surprised to read about some current "risk hedging" strategy that just deepens some market meltdown as the same system is triggered in a host of institutions.
And as before, we will get the "we made a mistake and won't do this again, so please keep trading with us" excuses.
Posted by: Alex Tolley | Saturday, October 13, 2007 at 02:38 PM
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Posted by: aizheng | Tuesday, October 16, 2007 at 01:44 AM