October 19, 1987- The First Great Crash of the Modern Era


This being the 30th anniversary of the 1987 crash, or "Black Monday," those that lived through that day are recalling their experience with it. This is a huge piece of market history, and, fortunately for short memories and better outcomes, we can laugh at it now. But it was quite unnerving back then. It remains, surprisingly, the biggest one day drop in the history of the stock market. And it wasn't that bad for us, relatively speaking. Markets in Hong Kong, Australia and the U.K. were hit even harder.

Seeing that the only means of electronic communication in those days was the radio, which I kept on in the background in my office, I was alerted to the massive panic taking place. It got progressively worse as the afternoon rolled on, and images of 1929 were rolling around in people's heads. The market was crumbling, and as the afternoon wore on, fast.

But as someone who was investing for awhile, and thought reading Value Line reports was an idea of a good time, I saw nothing but bargains. I called my broker at Kidder, Peabody and told him to buy all the General Electric shares my cash would allow at a certain price, which I deliberately low balled. And he said the words I would never forget, even thirty years hence:

"Kid, ya got guts. And guts deserve to be rewarded."

I mean, there was genuine panic selling out there, so for him to get a call like mine in the midst of this must have been something. I forget what price I specified, but I deliberately low balled it. There was no internet, and trade tickets were still written out by hand, and "dropped," in those days. I later realized I could have gotten the shares even cheaper, because people were just selling at ANY price, and for a time, the bottom really had dropped out, and the bid/ask was just completely off the rails. You simply tossed out a ridiculous price, and your order got filled. In any case, it was still cheap.

Guts were rewarded. This is GE's chart from January 1987 to July 1990.

To this day, the causes of the crash are still something of a mystery. Some blamed "program trading," the precursor to today's algorithmic trading, for the downturn, as each successive down-leg in the market spurred another round of sales. A few reforms, like the introduction of "circuit breakers," to halt trading if market swings got too wide, were deployed.

What was remarkable about the '87 crash is that it seemed to have little effect on the overall economy. In fact, the economy performed fairly well in its aftermath. Employment, for example, was quite stable until the recession that began in mid 1990. So it was nothing like 1929 or 2008, but of course, those debacles had other levers at work. But in all three cases, the market always came back.

I have always been captivated by the market's ability to change lives and empower the fortunes of ordinary people. This episode only strengthened that fascination, which I carry to this day.

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