A trader on the New York Stock Exchange looks at stock rates October 19, 1987 as stocks were devastated during one of the most frantic days in the exchange’s history.
Maria Bastone/AFP/Getty Images
About the author: Tim Morton is a retired portfolio manager with 45 years of experience working with private clients and is the editor of mortonir.com
I remember the day. It was 2:30 in the afternoon on a sunny Oct. 16, 1987. The stock markets were set to close at 4:00 pm and I was looking forward to the weekend. It had been a hectic two weeks. The global markets had been taking a pounding, during what had been up to that point a positive year. The phone rang; a couple were in reception and wished to speak with an advisor on setting up a portfolio of blue-chip stocks. I thought to myself, what a great way to end a difficult week.
The prospective investor, recently retired, sought my advice on which well-known U.S. securities he should purchase. We discussed Coca-Cola, General Motors and an assortment of excellent companies. There was a good meeting of the minds and he agreed to call me on Monday. Little did I know it was the calm before the storm.
Monday morning, exchanges opened with the stock markets continuing to be severely strained. By the close, the S&P 500 had dropped 20.5% on the single day of Oct. 19, 1987. It was indeed a Black Monday. There was no call from my prospective investor.
Tuesday morning arrived and after initial difficulty in getting the stock exchanges open, a relative calm settled in. There was a call from reception, the prospective investor had returned much agitated. It turned out that upon saying our goodbyes on the prior Friday, he had noticed the firm’s options and commodities operation located down the hall. Why not stop in and ascertain their views on investment opportunities?
The firm’s option specialist had recommended the investor sell put options on the S&P 500. He would be betting, in effect, that the market would not fall further, and he would receive substantial premiums, due to high stock market volatility. As a novice investor, he really had no idea what could possibly go wrong. The S&P 500 had already sold off 12% since reaching an all-time high just a few weeks earlier. The retiree and the option specialist felt a stock market bottom had been reached. Unknown to me, he had opened an account with the options department and effectively sold the market short. The investor was figuratively picking up pennies in front of a steamroller.
So instead of establishing a portfolio of well-managed companies, he headed Tuesday to his local bank branch. A visit to his bank manager was now required to raise additional funds to pay for his losses on the options trade. I pondered why an inexperienced investor would ever want to receive option premiums while exposing himself to potentially massive losses. I can only conclude that it is through the failure to understand the magnitude of the risk he was taking.
Thirty-five years later I see inexperienced investors making the same mistake of not understanding the risk they’re taking. It may be through overleverage, meme-stock speculation, or crypto exuberance. Market setbacks, such as we have experienced in 2022, can decimate investors’ capital when leverage is applied. For those speculating on meme stocks or crypto accumulation, know that there is no balance sheet or yield to protect your downside.
Rather than seeking quick returns, why not turn the tables and seek greater consistency of return, with a reasonable understanding of the risk taken?
A look back at the damage caused on Black Monday 1987 should serve as a strong reminder to those that are currently failing to explore potentially debilitating risks. Had the prospective client followed through with his original plan, he would have held a quality portfolio through a volatile period. By September 1989, many of the broad-based market indices had regained all the value lost in the 1987 crash.
Guest commentaries like this one are written by authors outside the Barron’s and MarketWatch newsroom. They reflect the perspective and opinions of the authors. Submit commentary proposals and other feedback to [email protected].
Black Monday’s Anniversary Is a Reminder to Think Seriously About Risk
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A trader on the New York Stock Exchange looks at stock rates October 19, 1987 as stocks were devastated during one of the most frantic days in the exchange’s history.
Maria Bastone/AFP/Getty Images
About the author: Tim Morton is a retired portfolio manager with 45 years of experience working with private clients and is the editor of mortonir.com
I remember the day. It was 2:30 in the afternoon on a sunny Oct. 16, 1987. The stock markets were set to close at 4:00 pm and I was looking forward to the weekend. It had been a hectic two weeks. The global markets had been taking a pounding, during what had been up to that point a positive year. The phone rang; a couple were in reception and wished to speak with an advisor on setting up a portfolio of blue-chip stocks. I thought to myself, what a great way to end a difficult week.
The prospective investor, recently retired, sought my advice on which well-known U.S. securities he should purchase. We discussed Coca-Cola, General Motors and an assortment of excellent companies. There was a good meeting of the minds and he agreed to call me on Monday. Little did I know it was the calm before the storm.
Monday morning, exchanges opened with the stock markets continuing to be severely strained. By the close, the S&P 500 had dropped 20.5% on the single day of Oct. 19, 1987. It was indeed a Black Monday. There was no call from my prospective investor.
Tuesday morning arrived and after initial difficulty in getting the stock exchanges open, a relative calm settled in. There was a call from reception, the prospective investor had returned much agitated. It turned out that upon saying our goodbyes on the prior Friday, he had noticed the firm’s options and commodities operation located down the hall. Why not stop in and ascertain their views on investment opportunities?
The firm’s option specialist had recommended the investor sell put options on the S&P 500. He would be betting, in effect, that the market would not fall further, and he would receive substantial premiums, due to high stock market volatility. As a novice investor, he really had no idea what could possibly go wrong. The S&P 500 had already sold off 12% since reaching an all-time high just a few weeks earlier. The retiree and the option specialist felt a stock market bottom had been reached. Unknown to me, he had opened an account with the options department and effectively sold the market short. The investor was figuratively picking up pennies in front of a steamroller.
So instead of establishing a portfolio of well-managed companies, he headed Tuesday to his local bank branch. A visit to his bank manager was now required to raise additional funds to pay for his losses on the options trade. I pondered why an inexperienced investor would ever want to receive option premiums while exposing himself to potentially massive losses. I can only conclude that it is through the failure to understand the magnitude of the risk he was taking.
Thirty-five years later I see inexperienced investors making the same mistake of not understanding the risk they’re taking. It may be through overleverage, meme-stock speculation, or crypto exuberance. Market setbacks, such as we have experienced in 2022, can decimate investors’ capital when leverage is applied. For those speculating on meme stocks or crypto accumulation, know that there is no balance sheet or yield to protect your downside.
Rather than seeking quick returns, why not turn the tables and seek greater consistency of return, with a reasonable understanding of the risk taken?
A look back at the damage caused on Black Monday 1987 should serve as a strong reminder to those that are currently failing to explore potentially debilitating risks. Had the prospective client followed through with his original plan, he would have held a quality portfolio through a volatile period. By September 1989, many of the broad-based market indices had regained all the value lost in the 1987 crash.
Guest commentaries like this one are written by authors outside the Barron’s and MarketWatch newsroom. They reflect the perspective and opinions of the authors. Submit commentary proposals and other feedback to [email protected].
Source: https://www.barrons.com/articles/risk-hungry-investors-should-remember-black-monday-51666119453?siteid=yhoof2&yptr=yahoo