What Caused the 1987 Stock Market Crash: Could It Happen Again

Shattered Fortunes: Unveiling the 1987 Stock Market Crash

Updated Oct 3, 2024

The spectre of a “Black Monday” type event looms perennially over the markets, reminding us that unpredictability is the only certainty in finance. Relying solely on the anticipation of market crashes, akin to putting all your eggs in one basket, defies the foundational principles of diversified investment strategies.

Historically, despite the occasional crashes, markets have predominantly exhibited bullish behaviour. Focusing on the growth potential is more pragmatic rather than fixating solely on the risks of downturns. However, prudence dictates that investors should avoid excessive risks and remain vigilant.

A strategic approach involves buying amidst fear and pessimism—when the market’s blood runs cold—and selling during peaks of optimism and excitement. This contrarian strategy aligns with historical market sentiment patterns, often providing early signals for those attentive to the market’s mood.

Understanding the dynamics of mass psychology is crucial. The market reflects collective human emotions—greed, fear, hope, and despair—all playing out on the grand stage of the trading floors. The 1987 crash, like others before and after, was not just a financial phenomenon but a psychological one. The reforms that followed, such as introducing circuit breakers and more robust market liquidity measures, underscore the lessons learned in managing such crises.

The Black Monday crash is a stark reminder of the inherent risks and opportunities in the stock market. It’s a historical point emphasising the importance of readiness and the ability to adapt to rapid changes in market conditions. By studying these events, investors can better prepare themselves to mitigate risks and capitalize on the opportunities that arise from such market disruptions.

From Boom to Bust: Navigating the 1987 Crash and Beyond

The 1987 stock market crash is a stark reminder of financial markets’ inherent unpredictability. This event, like others before and after it, exposed the fallibility of experts and the media’s propensity for sensationalism. While they hype crashes and stoke fears, the savvy investor recognizes these as opportunities to buy while prices are low.

The game remains the same, regardless of who occupies the White House. The power brokers control the fiat money system, pulling the strings behind the scenes. They manipulate the masses through fear, creating an illusion of freedom where decisions are limited to those that don’t threaten their control.

The Tactical Investor takes a pragmatic approach, focusing on reality and identifying trends. We recognize that market crashes are inevitable but also opportunities for those with a long-term perspective. The markets may experience severe corrections, but the overall trajectory remains upward.

As the Austrian business cycle theory suggests, credit-fueled booms inevitably lead to busts. However, this is not cause for panic but a strategic moment to buy. The significant crashes of 2000, 2008, and 2020 are reminders that market corrections are a natural part of the economic cycle. Those who learn from history avoid the herd mentality and make informed decisions.

In Mark Twain’s words, “History doesn’t repeat itself, but it often rhymes.” The patterns of market behaviour are predictable, and fear is a constant tool used by those in power. We must view fear as an opportunity, not a threat. By understanding the dynamics of market psychology, we can march to our drumbeat, seizing chances that others miss due to their reactive nature.

So, let the media play its tune, and the experts bray. We navigate the financial circus with a clear view, knowing that opportunity lies beyond the noise. The 1987 crash is a testament to the resilience of the markets and a reminder to focus on the long game, for that is where true wealth is built.

Riding the Waves: Seizing Opportunity Amidst Market Turmoil

Citizens of the financial realm, heed the lessons etched in the annals of our markets! The crashes of 1987 and 2020 were not mere calamities but pivotal moments that revealed the enduring rhythms of the economic tides. In those turbulent times, when the storm clouds gathered, and fear gripped the hearts of many, the seeds of prosperity lay hidden for those bold enough to see beyond the immediate tempest.

Consider the daring strategies of visionary investors during these epochs. A remarkable phenomenon occurred during the 2020 crash: corporate insiders began purchasing shares in unprecedented volumes, driving the sell-to-buy ratio down to a mere 0.35. This was no accident but a testament to their unwavering confidence in the resilience of their enterprises. Such actions echoed through the corridors of commerce, signalling a belief that the foundations were strong and the future held promise.

Reflect upon the wisdom of esteemed experts like Warren Buffett, who famously declared, “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.” During the darkest days of the financial crisis, Buffett did not retreat but advanced, investing heavily in undervalued assets. Similarly, Cathie Wood of ARK Invest, undeterred by scepticism, boldly invested in disruptive technologies, foreseeing their transformative impact on our world.

Observe, too, the global landscape where political and social upheavals stir the waters of commerce. While some regions are uncertain, others emerge as beacons of stability and growth. With its dynamic economies, Asia offers a tapestry of opportunities for the discerning investor. Do not let the shadows cast by unrest obscure the horizons where new markets and innovations rise like the dawn.

The challenge is not the volatility of markets but the lenses through which we view them. Too often, preconceived notions cloud judgment, leading individuals to seek only what affirms their fears and doubts. Let us cast aside these biased spectacles! Embrace instead a vision untainted by prejudice that discerns not just the perils but the vast potential awaiting those who dare to act with insight and courage.

The Farce of False Prophets: Charting Your Course Through Financial Folly

Friends and fellow stewards of wealth, let us peel back the curtain on the so-called experts who prophesy doom with every market tremor. Clad in the raiment of authority, they declaim with fervour, yet their words ring hollow, echoing the same tired refrains that have misled generations. They are the harbingers of hysteria, not grounded in wisdom but propelled by the winds of sensationalism.

Behold how the media amplifies their dire pronouncements! Sensational headlines scream from every corner, designed not to inform but to incite. They feast upon fear, for they know that a populace in panic is malleable, their reason overshadowed by emotion. Yet beneath this cacophony lies a simplicity they dare not acknowledge: markets are cyclical, and volatility is not a sign of ruin but a natural ebb and flow.

Let us not be swayed by these purveyors of panic! Recall the insights of Nobel laureate Richard Thaler, a behavioural economics pioneer who reminds us that markets are often influenced by human irrationality. Yet more profound wisdom comes from Nathan Rothschild, the legendary 19th-century banker who made his fortune during the Battle of Waterloo. His immortal maxim, “Buy when there’s blood in the streets, even if the blood is your own,” exemplifies the courage to seize opportunity amid chaos.

Consider the sagacity of James J. Hill, the “Empire Builder” of the American Northwest, who built his railroad empire during the Panic of 1873. While others retreated, Hill recognized that economic downturns presented rare opportunities to acquire assets at favourable prices. His strategic acumen during crises demonstrated that true wealth is built not by following the crowd but by maintaining clear judgment when others succumb to fear.

We must be the masters of our fate, steering our ships through the seas of commerce with wisdom and foresight. When others rush to abandon ship at the first sign of squalls, we shall hold firm, knowing that turbulence also brings opportunity. Disregard the clamour of those who peddle fear for their gain. Instead, listen to the clarion call of reason and the counsel of those whose insights are forged in experience and intellect.

Opportunity does not shout from the mountaintops; it often whispers in the quiet moments when others have ceased to listen. In these moments, fortunes are made, and history favours those who act not out of fear but with boldness and clarity of purpose.

Unraveling Market Crashes: Lessons from 1987 and 2020

The 2020 stock market crash, much like the infamous Black Monday of 1987, starkly illustrates the cyclical nature of financial markets. Both events, characterized by sudden and severe downturns, underscore the importance of understanding market psychology and the potential for turning crisis into opportunity.

During these periods, insider activity often provides critical signals about market sentiment. For instance, a significantly low sell-to-buy ratio, such as the 0.35 observed during the 2020 downturn, indicates a strong belief among insiders that the market will recover. This level of buying suggests confidence that can be a beacon for other investors navigating the stormy markets.

Historically, September has been viewed as a risky month for stocks, yet it often presents lucrative buying opportunities. The Tactical Investor’s approach of patience and discipline—buying low and selling high—mirrors the strategies employed by some of the greatest minds in investing. Jakob Fugger, the Renaissance merchant, advocated seizing opportunities amidst the turmoil, a sentiment echoed by modern investment legends like John Templeton and Charlie Munger. Templeton famously stated, “The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.” Similarly, Munger’s investment philosophy emphasizes the importance of contrarian instincts, advising to be “fearful when others are greedy and greedy when others are fearful.”

The Federal Reserve’s response to the COVID crash, introducing measures like the commercial paper funding facility, also highlights the role of external support in stabilizing markets. Such interventions are crucial in maintaining liquidity and investor confidence during crises.

Investors are encouraged to adopt a mindset that aligns with these historical and philosophical insights. By understanding the psychological underpinnings of market movements and maintaining a disciplined investment approach, one can survive and thrive in the aftermath of market crashes. This strategy involves recognizing the inherent opportunities that arise when others are driven by fear and panic, a principle reinforced by the experiences of the 1987 and 2020 crashes.

Conclusion: Market Crashes Are Buying Opportunities

Market crashes have historically been viewed as times of fear and panic, but they can also buy opportunities for savvy investors who keep a cool head and follow the market’s trends. The key is to use mass psychology to understand sentiment dynamics and identify early warning signs. By staying disciplined and focusing on the trend, investors can achieve long-term success and turn market crashes into buying opportunities.

In conclusion, Fugger, Templeton, and Munger’s wisdom provides a robust framework for turning market crises into opportunities. By studying these downturns through the lens of seasoned investors, one can gain the perspective needed to capitalize on the cyclical opportunities presented by the financial markets.