October 19th, 1987, or Black Monday as it has become known, was the day of the 1987 stock market crash (well actually it was 19th October in the USA, and 20th October in Australia, but let’s go with the date it started overseas).
The US market dropped 23%, the biggest single day fall in the US Stock Market’s history. The Australian market fell even more (25%).
Since that time there have been other, larger in dollar term falls, but the 1987 one was still the largest single day percentage fall by quite some distance.
The causes of the 1987 crash are still debated to this day, but the main reasons appear to be:
* Computer program trading, which was set to try and automatically exit stock positions when markets started to fall (which instead just added to the fall), and
* Overvaluation of shares, which is easy to see in hindsight, but not as easy to see at the time.
One thing that is interesting, is that even though there was a 23% fall on 19/10/1987, the US Dow Jones index still returned 2.26% for the 1987 year (i.e. it had a massive increase in value in the lead up to October). Hence, if you look at the full year, it is nowhere near as bad as the headlines say.
So what are the key things to learn from the 1987 crash (and others that have followed)? We I think the key points are as follows:
* We should take a moment to remind ourselves that stock markets are there for long term investing, not short term gambling.
* The real money is made by investing in quality businesses that compound their earnings over time.
* After markets crash, they also recover, so having some spare ‘fire power’ on the sidelines is always a good thing.
* We should pay less attention to short term media talk, and rather focus on the long term. Whether your shares go up 1% or down 2% today is irrelevant, what we want is something that will appreciate (and/or paid good dividends) over multiple years.