Paul Clitheroe on the 1987 crash

Black Monday in 1987 was and still is the largest single day decline in stock market history. On October 19, 1987, the US’s Dow Jones Industrial Average declined 23%. Despite having time to digest these falls, the Australian market (dubbed Black Tuesday here) dropped 25%.

Markets are complicated creatures, and the exact cause of the crash is still unknown. However, many put it down to the algorithmic trading that was taking place, layering sell orders on top of sell orders, worsening the fall.

As we draw closer to the 35^th anniversary of the crash, I gave InvestSMART Chairman Paul Clitheroe a call to share his experience, how he managed his clients through it and to hear his lessons he learnt from the event.

Do you recall the day and where you were when it unfolded?

I was at the office. It was the early days of IPAC, and I was sitting in the office watching it unfold. The feeling was no different to when Lehman Brothers went down, and we went into the GFC.

The thing people forget is that from January to October, we had the most ridiculous run-up in prices. The market was absolutely hammering along, and we were scratching our heads, saying, “God, the valuations are blowing up.” And we were wondering when that was going to come to an end. Would it be a long, slow, downward grind, causing you to worry for a year or two?

The nice thing about ’87 was that we didn’t need to worry too much about it – it just collapsed. So, you went from an overvalued market to an undervalued market in one day.

How did your clients react?

They were pretty calm. We spent a lot of time with our clients, talking to them about risk and how to think in market downturns. Our clients were also diversified, so they didn’t have all their money in shares. They were spread out.

They were ringing us, saying they weren’t worried about the drop, “but out of curiosity, are we likely to still see dividends in the second half? Will we still get spending money from our shares?” And we said, we think you will. We think people are still buying food from Woolworths; we think people are still using electricity; BHP will keep producing stuff from the ground; we think people are still borrowing money. So no, we don’t think your dividends are going to go away. Those cornerstone companies that make up the ASX 200, they aren’t going to go away.

We had no one who sold, and one of the benefits of a big crash like that is you didn’t get time to panic and sell.

Were you telling them to buy?

Our clients weren’t buyers though. You might need to be pretty gutsy to buy, but history tells us you’d be nuts to sell. This was not a selling day. When a crash like that comes along, we all know we should be buying, but bluntly, we probably won’t have the courage to do it to be honest.

Dollar-cost averaging is great for these downturns. That’s why these days, things like regular contribution plans are great. We’re putting in our money, and as the market goes up, our money is buying less, and as it goes down, we’re buying more.

How different was the availability of news and the speed to transact?

The speed of information and the speed to act right now is a lot faster than it was back then. Now you can pull out your phone, get an update in a second from any number of talking heads and immediately jump on your trading app and make a transaction. There’s no circuit breaker. Back then, we didn’t have time to even think, and that was a good thing.

The only people who lost out from the ’87 crash, is if you invested all your money on the night before and you sold the whole lot the day after. You are pretty much the only loser out of the ’87 crash. Let’s not forget, if you invested on January 1^st and did nothing, come the following Christmas, you had made a small profit. The run-up was so hot from January  1^st – the day after the crash, you were down, but the recovery was just as strong.

What’s the benefit of investors understanding stock market history?

I think economic history is a really good thing, something I would be always saying to our InvestSMART family, you can look back at decades and decades of graphs all the way back to the 1880s and see crashes but you will also see the markets recover and go on to new heights.

People understand the history of housing prices in Australia but a lot of people don’t have that same history with shares. When I started IPAC back in ’83 only three per cent of Australians owned shares. And I think that’s really important DNA stuff. If you don’t have the history of investing in shares and you have a downturn like ’87 or like COVID they don’t have that history of recoveries to lean back on. It’s not deep in our DNA, it will be in 100 years but unfortunately for people it’s not there yet.

If you want to read further about Black Monday, Intelligent Investor’s Graham Witcomb wrote this excellent article on the 30^th anniversary and this article from Eureka Report.