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Showing posts with label Stock Market Crash. Show all posts
Showing posts with label Stock Market Crash. Show all posts

Thursday, October 10, 2013

History of Black Monday - US Stock Market Crash

On Monday, October 19, 1987, the Dow Jones Industrial Average declined 22.6% in the largest single-day drop in history.

This one day decline was not confined to the United States, but mirrored all over the world. By the end of October, Australia had fallen 41.8%, Canada 22.5%, Hong Kong 45.8%, and the United Kingdom 26.4%.

Black Monday, as it has become known, was almost twice as bad as the stock market crash of October 29, 1929. The 1929 decline approximated 11.7% and started the Great Depression.

The Securities Exchange Commission, academic professors, financial writers and every financial security firm has analyzed the stock market crash of 1987 in about every way possible.

Some believe the market crash was caused by an irrational behavior on the part of investors. Some analysts believe that excessive stock prices and computerized trading were the cause.

The key finding is that no single news event occurred that could account for the crash.

The stock market was doing quite well for the first nine months of 1987. It was up more than 30%, reaching unprecedented heights. That was after two consecutive years of gains exceeding 20%.

By 1987, interest rates began to climb. Three days before Black Monday, the stock market gains for the year dropped by 11.6%, including the effects of a 9.5% drop on October 16, 1987.

The three day drop was caused by several macroeconomic factors. Long-term bond yields that has started 1987 at 7.6% climbed to approximately 10%. This offered a lucrative alternative to stocks for investors looking for yield.

The merchandise trade deficit soared and the value of the U.S. dollar began to decline. After a speech by Treasury Secretary Jim Baker, investors began to fear that the weak US dollar would cause further inflation.

On Monday, the Dow dropped about 200 points or 9% in the first hour and half. During the day, most institutional investors implemented various computer-based portfolio insurance programs.

Portfolio insurance was destabilizing because it required selling stock as prices declined. The more stocks fell, the more stocks were sold. As the market did not have the liquidity to support the sales, the stock market fell even further.

Buyers waited, knowing the more the market dropped, the more selling would have to take place. By the end of the day, the Dow had lost 508 points.

One important lesson came out of this 1987 stock market crash: Investors who sold, were taken to the cleaners. Those who held and continued a disciplined and systemic approach received rewards.

In fact, by the end of 1987, total return for the year, including dividends, approximated 5%.

Sunday, August 29, 2010

George Soros Principles

George Soros -Was he one of the world's greatest investors?

George Soros will always be remembered for his almost $2 billion profits made when he shorted the British Pound. Or making over 60% yearly returns on his Quantum Fund with almost $4 billion under management.

Staggering returns by any standard! But not too many seem to recall George Soro's horrific 60%+ losses in his funds when he was caught in the 1987 crash!

In fact, Soros even admits that he is rarely more than half right.

His secret, "I simply make a lot of money when I am right and lose as little money possible when I am wrong"

Soros investment principles were different to many fund managers today. Not for him was the systematic, mathematical approach to the markets. He liked to look at them practically.

Soros's basic principle was to view a country. He would look at their currency or stock market and try to see if the current trend was wrong.

If he believed the current trend had "really overshot" (as trends usually do) then he would go the other way. He would take the contrarian view.

What are the advantages of adopting this kind of contrary approach?

When a trend that has been present for some time does over-shoot it is only a matter of time before it reverses. With more and more trend followers simply following the trend there will come a time when there are no more buyers in a bull trend or sellers in a bear trend. When this point is reached the trend will sharply reverse.

The person who had the "guts" to go against the trend will make a killing. But, whilst trends do over-shoot, they can overshoot by a much bigger margin than you could ever possibly imagine. Many trends have really overshoot and many, many months before the market had the chance to realize it.

Take a look at the 1999-2000 NASDAQ. Was it overbought? YES. By a long, long shot! But trying to predict this and betting against that trend during this over blown bubble, would have resulted in catastrophic losses.

Losses, Soros himself was not immune from. Many investors bet a number of times trying to predict the end of the stock market bull/bear trends and they did lose most of their fortunes.

Knowing a trend has overshot is one thing. Profiting from it is a very difficult and risky game. Huge risks with huge rewards or huge losses.

Soros was caught on the wrong side of the October 1987 stock market crash and lost a staggering $200 million in just one day. It was estimated his funds lost anywhere from $650 million to $800 million during this crash. Although Soros himself claims that the actual figures were much lower.

Soros's reply to this? "I made a very big mistake, because I expected the crash to come in Japan, and I was prepared for that, and it would have given me an opportunity to prepare for the fall off in this country, and actually it occurred in Wall Street and not in Japan. So I was wrong."

Soros - by his own admissions - had no secret. He made his mind about a market and simply made big bets. If he was right, he made a ton of cash. If he was wrong, he paid for his mistake and just kept on moving on.

We do consider George Soros to be or have been one of the very best minds in the markets. On the other hand, his approach is not really suited to everyone.

Tuesday, July 27, 2010

History of Black Monday - US Stock Market Crash

On Monday, October 19, 1987, the Dow Jones Industrial Average declined 22.6% in the largest single-day drop in history.

This one day decline was not confined to the United States, but mirrored all over the world. By the end of October, Australia had fallen 41.8%, Canada 22.5%, Hong Kong 45.8%, and the United Kingdom 26.4%.

Black Monday, as it has become known, was almost twice as bad as the stock market crash of October 29, 1929. The 1929 decline approximated 11.7% and started the Great Depression.

The Securities Exchange Commission, academic professors, financial writers and every financial security firm has analyzed the stock market crash of 1987 in about every way possible.

Some believe the market crash was caused by an irrational behavior on the part of investors. Some analysts believe that excessive stock prices and computerized trading were the cause.

The key finding is that no single news event occurred that could account for the crash.

The stock market was doing quite well for the first nine months of 1987. It was up more than 30%, reaching unprecedented heights. That was after two consecutive years of gains exceeding 20%.

By 1987, interest rates began to climb. Three days before Black Monday, the stock market gains for the year dropped by 11.6%, including the effects of a 9.5% drop on October 16, 1987.

The three day drop was caused by several macroeconomic factors. Long-term bond yields that has started 1987 at 7.6% climbed to approximately 10%. This offered a lucrative alternative to stocks for investors looking for yield.

The merchandise trade deficit soared and the value of the U.S. dollar began to decline. After a speech by Treasury Secretary Jim Baker, investors began to fear that the weak US dollar would cause further inflation.

On Monday, the Dow dropped about 200 points or 9% in the first hour and half. During the day, most institutional investors implemented various computer-based portfolio insurance programs.

Portfolio insurance was destabilizing because it required selling stock as prices declined. The more stocks fell, the more stocks were sold. As the market did not have the liquidity to support the sales, the stock market fell even further.

Buyers waited, knowing the more the market dropped, the more selling would have to take place. By the end of the day, the Dow had lost 508 points.

One important lesson came out of this 1987 stock market crash: Investors who sold, were taken to the cleaners. Those who held and continued a disciplined and systemic approach received rewards.

In fact, by the end of 1987, total return for the year, including dividends, approximated 5%.