October 19, 1987 – Black Monday
On October 19, 1987 – Black Monday – the U.S. stock market crashed 22% in one day. Linda Brezezinski (my only staff member at the time) and I were very busy that day…buying! That night, I served as an adjunct faculty member for the CFB Board and taught a course at Northwestern Michigan College to those achieving Certified Financial Planner (CFP) designation. An hour or so in to the class one of my students, noticeably annoyed, blurted out, “Aren’t you going to mention the stock crash today?” Unphased neither by his comment nor by the day’s financial news, I looked at him and said simply, “This [crash] is normal stuff,” and then briefly discussed the market’s swoon that day. The following week we talked about a conversation I had with a client who was also pursuing her CFP so she could manage her husband’s medical practice more efficiently. She had called me the day after the “crash” to sell 100% of the stocks in her family retirement accounts. When I asked why, she said her risk tolerance had changed and wanted “to sell everything and go to money markets until everything settled down.” I told her that about 50% of her portfolio was already in money markets the day before the crash, but now we were getting 100% invested because there were so many bargains around. We did not own a lot of bonds at that time, because we felt they were not good values for “growth”-oriented investments (on behalf of her young family). I explained (as adjunct faculty) that she had learned in her CFP training that “Risk tolerance does not change with market fluctuations, the economy or business cycles – it is a constant, and measures the amount of volatility that one can stand in pursuit of [good, sustainable, solid] investment performance.” She said, “I think the world has changed [by the events of black Friday] and we are going into a great depression, and I don’t want to be invested, so move me to cash.” Logic did not matter, fear was the driver for her, so cash she got.
Templeton was steady and saw market volatility as a friend to investors, allowing the most savvy to benefit from lower prices. Buying a dollar’s worth of goods for 50 cents is better than paying a dollar, and thus buying investments at better prices results in less risk and better future performance.
Black Friday was a great example of one of those “teaching moments” that educators lust for, and my intent was to milk it to the extreme. My students understood the market and how mass hysteria affected it. In explaining Black Monday, Bloomberg quotes Investopedia: “Interesting enough, the cause of the massive drop [on Black Monday] cannot be attributed to any single news event, because no major news event was released on the weekend preceding the crash. While there are many theories that attempt to explain why the crash happened, most agree that mass panic caused the crash to escalate.”
Though I was young in 1987, I was not unschooled in the market’s volatility. As a student of the markets, I had watched as the Dow dropped from a high of 1051 in January of 1973 to a 578 low the following January (1974), only to rise again to near its January 1973 high a couple of years later (1015 on 9/21/76). My reading was mostly Sir John Templeton who was a values and value-driven global investor who searched the world for opportunities. Templeton was steady and saw market volatility as a friend to investors, allowing the most savvy to benefit from lower prices. Buying a dollar’s worth of goods for 50 cents is better than paying a dollar, and thus buying investments at better prices results in less risk and better future performance. Early in my career I learned that markets fluctuate – that’s a good thing. Don’t sweat the day-to-day volatility. If Templeton were alive today, he would most likely be handing out organic tee shirts printed with “Keep calm and stay the course” or “Keep Calm … Markets fluctuate – that’s a good thing ” emblazoned on them.
As I am writing this, most world and U.S. markets are down less than 10% on the year and around 10% from the [Dow] high on May 19. Most of the economic world is pointing to China for this market swoon. Some attribute it to quantitative easing. Others may point to Greece or falling oil prices. China’s markets have had quite a run lately. The Shenzhen Stock Exchange Composite Index is a market cap-weighted index that tracks the A-share and B-share lists on the Shenzhen stock exchange. Unlike the U.S. and most European and Asian markets, the Shenzhen is up this year, rising from 1394 at the beginning of the year, peaking at 3156 on 6/12/15, and now sitting at around 2000 points today. Markets fluctuate, obviously, even in China.
Still, we have been very active during the past several weeks, selling investments that we felt were “not as good” as other investments due to price, value and the current landscape we see developing. I have spent my career scratching my head during times like this, watching smart, thoughtful people panic and turn their investments to cash. Things are never stable. Everything fluctuates. Everything changes. Still, there is a near constant move forward for most boring old steady-eddy economies. If the economy is doing well, it’s up a few percentage points. If it’s doing poorly, it’s either up a little, flat or down a bit. And the investment markets go crazy around the boring, old economy and its few percent swings over time. The chart below illustrates this fact quite well. The blue line Total Nominal GDP rises steadily over this 25-year period. The stock markets as illustrated by the orange line (S&P 500 stocks) and the green (Euro Stock 50) fluctuate a lot.
The worry about China is not irrational and is based in fact. China’s economy will grow slower than it was expected to, and that will spill over into slower global economic activity and slower world demand. But this is nothing new. Everything is cyclical, and economies naturally have recessions, slow periods, periods of modest growth and boom times. Economies chug along, life goes on and most companies keep paying their dividends, making products people will buy and doing that profitably.
My point in this missive is that all this fluctuation is normal and good. Recessions let poor-producing industries and companies reorganize, retool or sell out to a stronger competitor. Some companies need to fail, not because they are “bad” but because they are producing stuff that is no longer relevant. Henry Ford put buggy manufacturers out of business.
People often are unable to see that the future is a bright and wonderful place. Rather, they see the problems and some see the “good ol’ days” as good. But my school teacher, a Depression-era mother, gets mad when people will talk about the “good ol’ days.” She says, “good ol’ days, huh? Women could not vote, blacks could not sit next to me on a bus, my school friends were killed in WW2, kids I taught were killed in Vietnam, presidents were getting shot and killed, race riots were happening. I will take today’s problems any day.” Yes what we have are gridlocked political systems, governments printing money, China, Greece, the Euro, Donald Trump and immigration issues, but the economy will go on. This all creates opportunities for the thoughtful to profit and increase their security. In times of stress (perceived or real) it seems that money is transferred to the wise who think long-term from those who panic and say “My risk tolerance has changed, sell everything, until things look brighter.” The perception is that fluctuating currencies, Greece and China will have a big effect on “all” investments – the truth is they won’t.
There are only a few times where I have been more optimistic about our clients’ future investment returns. The recent selloff and years of economic growth since the financial crisis in 2008 have created real value and many bargains in both the stock and bond markets. Yes, we believe that the economies of the world will be slow, the forces of currency will be in unrest, and government interventions will cause significant short-term volatility. Today, based on most any measure, dividend yields, price to cash flow, price to net asset or private market value, the stocks in client’s portfolios are priced right to perform into the future. Bottom line: We at FIM Group see the recent selloff as a opportunity, just like we did during the Black Monday crash in 1987, the GFC of 2008 and other selloffs. This is not a time to be ruled by fear. Rather, it is a time to be ruled by pragmatic, thoughtful forward-looking optimism. There are many great companies and great investments selling at great prices.