This month's Newsletter is a bit more personal than most. On October 19, 1987, Black Monday, I was on the bond desk. We had spent the summer setting up Freedom Bond brokers as a business and I ran the mid Canada bond desk. We had literally just started trading.
We knew on the way to work that it was going to be a bad day in the markets. Bonds included. As the market opened it sounded like a sound track from a WWII air war movie. Lots of screaming and yelling into the headsets. I remember one trader called and said he needed to sell CAD$50 million of bonds for a large pension fund. It was on his head. He asked the bid and asked priced and sold immediately, on the bid. It came to me later that he didn't even know the closing price. It was mahem.
We took turns walking to the stock exchange to see the mayhem there. By 10:30 there were line ups of news trucks on York Street. It was truly extraordinary.
The market ended losing 23% of its value in one day. Margin calls started going out (for people who were trading on borrowed funds). People were forced to put their houses up for sale.
Here’s the perspective: on Black Monday the Dow lost 508 points. Last Monday, February 5th, the Dow lost 1175 points. The difference? The Dow Jones has grown from 1,738 points in 1987 to over 26,000 before the drop last week. So, while 508 points in 1987 was 23% of the market’s total, 1175 was 4.6%.
After Black Monday, the markets recovered. Over the next 2 days, the markets gained 300 points back, and kept gaining over the next few months.
Today, our economic fundamentals continue to be strong. (See our January Newsletter.) Our goals are to stay objective during times like these. Having said that, the set it and forget it model is without thought and doomed to mediocrety and potential danger due to lack off attention. (see chart above). While I hope to never see another day like October 19, 1987; it was a grand lesson in keeping my focus on the long term big picture vs focussing on the short term gyrations. Time and experience has its own benefits.