Taking Advantage of Market Declines

On October 19, 1987, Wall Street watched with disbelief as the Dow Jones Industrial Average plunged a near 23%, giving birth to the event that is now referred to as Black Monday. This crash sparked fear among investors about the certainty of markets as it was the largest single-day stock market collapse of its time. Although the causes of the crash are still widely debated, this event reveals an important investing lesson on why market declines present an opportunity to make money.

Leading up to Black Monday, the Dow was experiencing all-time highs in August of 1987. As the economy began to slow down after its quick recovery from the early 1980’s recession, several events took place that October which negatively impacted the stock market. The timeline includes: a record drop for the Dow at the time of 3.8% on October 14th, an Iranian missile hit an American owned supertanker called the Sungari on the 15th, and on the 16th, a cyclone known as the Great Storm of 1987 hit England, France, and the Channel Islands, resulting in the closure of the London markets. On this day, the Dow fell 4.6% on record volume. Little did everyone know that there was a greater storm brewing for Monday.

On Monday the 19th, the Eastern markets opened at a much lower price, followed by accelerated selling during London time as people reacted to the market closure that had just taken place on the 16th. Later that morning, U.S. warships shelled an Iranian oil platform in response to the missile attacks on the tankers. The combination of these events reduced the price of the Dow by 508 points, bringing it down to 1738.74. Those who bought insurance on the market with bets against it made serious money. Nassim Taleb, who wrote the New York Times’ Bestseller The Black Swan, states that he made “a ton of money” this way.

The Crash of 1987 was predicted to have severe effects on the economy, but in reality, the crash barely affected it. The economy actually grew and the pre-crash highs were recaptured in 1989. This series of events teaches us an important lesson when it comes to investing: buy low, sell high. The market rewarded those who bought stocks at reduced prices during the crash and held onto them as the market began to correct itself. This shows that any overreaction in the price of a single stock or the whole market presents a buying opportunity. These overreactions are sometimes even more pronounced because of the programmatic trading that happens by computers today.

At Fogel Capital Management, we make sure to take advantage of irrational declines. We have over 20 years of investing experience and know exactly how to utilize data to make investment decisions that fit your risk tolerance. Call us at (772) 223-9686 today for a free consultation on how we can construct a personalized investing strategy for you.