This week is the 30th anniversary of the stock market crash of 1987. Reading through the articles meant as recollections of the events of the day, it is hard to miss the fear s that bear markets, and especially market crashes, bring. Living as we are in an 8-year bull market, some of the younger investors who have not experienced a crash before would do well to read some of the articles. Some of the other key reflections from this week’s readings are the importance of having a simplified investing strategy and that bitcoin and cryptos may be here to stay.
How papers captured the crash (Source: The New York Times )
Reminiscing Black Monday
Bloomberg Markets: The Crash of ’87, From the Wall Street Players Who Lived It
Relive the crash to get a feel of how markets work and players react in a crash:
“I remember walking from the 41st floor down to the 40th floor. The 41st floor was this cathedral of bonds, and then you walked down to 40 and were in this cramped, low-ceiled, dark place that was the equity department, with a lot of guys who were named Vinny and Tommy and Donny….they were all
going through this visceral animal experience. People were screaming and going absolutely crazy in ways I’d never seen before.” (Michael Lewis, author)
“My group had been up about $9 million for the month, and by the end of the day we were only up $1 million” (James Leitner)
Experts know nothing much on where markets are headed: “I dislike talking to people who have been investing for a few decades and still haven’t figured out that “experts” don’t know where the market is going.”
Start now to get the experience: “Buy things that are going up is good advice, but it’s also meaningless advice because some things can’t be taught. Nobody can tell you how to make money and how to lose it, or how to lose a little and stop playing. In trading and in life, there is no substitute for experience, so get going!”
Rod Maciver: I Passed on Berkshire Hathaway at $97 Per Share
A successful approach: “An approach that is much more likely to be successful – investing in high quality companies after a market decline of thirty percent, and retaining the liquidity to build positions in those companies after a fifty percent decline in the broad market averages. That takes extraordinary patience, which is a matter of personality.”
The importance of endurance: “…businesses and their investors need more than slippery bursts to succeed. They need endurance. And endurance resides in long-term bets. Things you can pour energy and capital into today with a reasonable chance of still bearing fruit ten years from now. Which tend to be things that are stable in time.”
Good companies combine both change and timelessness: “Every successful investment is some combination of change that drives competition and things staying the same that drives compounding….Investors weigh the importance of change and timelessness differently, but every great company has some element of both. The extremes are where things don’t work.
Take the long term look in investing: “Few individuals or professionals are truly able to take the long view. There are too many behavioral and incentive-related pressures to do otherwise. However, the rewards for being able to follow a disciplined investing strategy focused on the long-term are likely to be meaningful for those who are able to do so.”
Joshua Brown, CEO at Ritholz Wealth Management, recounts his experience at the a crypto currency summit organised by Patrick O’Shaughnessy (Invest like the Best Podcast). His disclaimer is important to note: “Do not place any trades based on my remarks here, I don’t know anything about this “asset class” and probably no one else really does either.” The key take away for me: Blockchain´s impact is just beginning and that there is a lot we do not know about it. Learn a lot about it before you even think of investing in it.
Consider simplicity in your investment approach: “You should be able to explain your investment strategy at a basic level, enough that you can convey it to a friend of equal intelligence.”
What matters in investing is relative skill matters not absolute skill. How is your level of skill when compared to others.
Notable that nearly $1.2 trillion has been withdrawn from active management since he end of 2006. Most of this has moved into index funds causing distortions in the markets, he believes, such that valuations for certain stocks are higher than they would be. Intra sector correlations are moving up. Dispersions have been dampened down. Liquidity providers, especially the active managers, are reducing.
Index funds charge 20 basis points as fees while active funds averagely charge 80 basis points. A switch from active to passive saves you 60 basis points. However, controlling your behaviour (the behavioural gap) in financial markets can save you 120 basis points. Therefore, behaving well may save you more than what changing to passive funds can.
Fun fact: There are less companies listed now in US markets than in 1976, peaked in 1996.
Pay attention to the base rate. Anchor your expectations on the base rate. Also ask yourself: Why is their an expectation gap and why do i think i can exploit it?
Erick Mokaya's Blog 