Just over twenty-five years ago, stock markets crashed on what has since become known as Black Monday, October 19, 1987. At the time, I ran an investment boutique in London that offered a single type of product – small cap equity funds for institutional investors. Obviously, our clients were somewhat concerned by the losses that they were suffering (the Dow Jones index lost over twenty percent in one day). I too was scared: had certain key clients decided to withdraw their assets, the firm might not have survived.
Consequently, I spent a good part of that Monday night re-reading J.K. Galbraith’s excellent book on The Great Crash 1929 trying to understand what might be going on. Actually, I came away somewhat reassured; the world and the markets had changed a great deal since 1929. Institutions had replaced private speculators as the dominant market participants and, as a result, investors were rather better informed. But on Tuesday, newspaper headlines proclaimed “Bedlam on Wall Street” (Los Angeles Times) or “Wall Street Goes Mad” (New York Post) and even the Financial Times talked of “panic selling”. Under the circumstances, we felt that we should communicate our views on the situation to our clients. I wrote a short memo, which we mailed to our clients on Tuesday evening. Just recently, I found a copy of that memo (pdf) in my files. It looks very dated with its primitive daisy wheel printer font. But, somewhat to my surprise, I still agree with its basic message. Investors should still assume that they might not be able to change their allocation in periods of stress. Dynamic strategies that depend on the precise timing of transactions may fail in distressed markets and pro-cyclical tactical moves can be very costly, particularly in terms of missed gains if the moves are badly timed.
By the way, we did not lose a single client in 1987. I do not know if the memo played any role in their decision to stay invested. Perhaps sometimes one simply does have the clients that one deserves…
