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

Shattered Fortunes: Unveiling the 1987 Stock Market Crash

Updated May 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. It’s more pragmatic to focus on the growth potential rather than fixate 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 the 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 it, 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 serves as a stark reminder of the inherent unpredictability of financial markets. 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 actual 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: Capitalizing on Market Crashes

Though separated by decades, the stock market crashes of 1987 and 2020 share striking similarities that underscore the cyclical nature of financial markets. Rapid sell-offs and extreme market volatility marked both events, yet they also presented unique opportunities for astute investors to capitalize on lower stock prices.

During these tumultuous times, insider buying activity can significantly indicate market sentiment. For instance, a sell-to-buy ratio as low as 0.35, observed during the 2020 crash, signals a strong insider confidence in the market’s recovery. Such data points suggest that those with intimate knowledge of their companies see long-term value despite short-term market fluctuations.

The principle of contrarian investing—buying during panic and selling during euphoria—is a time-tested strategy that aligns with the wisdom of renowned investors. Jakob Fugger, the Renaissance banker, believed in the power of strategic investment during market distress. Sir John Templeton famously advised that “the time of maximum pessimism is the best time to buy,” a sentiment that echoes through the actions of investors who thrive by going against the market tide. Similarly, Charlie Munger advocates for the discipline of rational decision-making amidst market chaos, emphasizing that “the big money is not in the buying and the selling, but in the waiting.”

Political and social unrest often accompanies financial volatility, affecting markets globally. While regions like Europe and America might experience increased instability, Asia presents a mixed scenario, with relative calm in some areas and tension in others. Investors must navigate these geopolitical factors without succumbing to fear-driven decision-making.

The problem with most individuals is that when they look at the markets, they do so with biased eyes. They already have preconceived notions, and they look for data to support these notions. Market Update May 19, 2017

The Burlesque of Expertise: Navigating the Financial Circus

In the grand spectacle of financial markets, the so-called experts and fear-mongering pundits are nothing but well-dressed jackasses, parading their broken clocks, hoping for a moment of accidental correctness. Their predictions of gloom and doom, recycled century after century, are not rooted in any profound understanding but in the simple fact that they, too, are broken. Like a stopped clock that’s right twice a day, these self-proclaimed oracles might stumble upon an accurate prediction, but by then, you’d have lost your shirt following their misguided advice.

The financial media, with its sensationalized headlines and shallow analysis, is the ringmaster of this circus. They profit from the chaos they create, feeding off the irrational reactions of the masses. But beneath this orchestrated chaos lies a predictable pattern—a game played by the powerful to manipulate the fearful. And the fear they instil is a weapon wielded with precision to elicit the desired response from the crowd.

But we, the contrarians, refuse to be part of this mindless herd. We march to the beat of our drum, recognizing that the real opportunity lies in the very moments when others are consumed by panic. As the masses stampede, we calmly step aside, watching the big players swoop in to buy at rock-bottom prices. We understand that fear is not our enemy but our greatest ally, revealing hidden chances for those brave enough to embrace it.

Jonathan Swift, the master of satire, once said, “It is useless to attempt to reason a man out of a thing he was never reasoned into.” These experts and their followers are not swayed by logic or reason but by their broken internal compasses. So, we turn to another satirical genius, Mark Twain, who offers a more pragmatic approach: “Whenever you find yourself on the side of the majority, it is time to pause and reflect.” Pause, indeed, for the majority is often wrong, driven by fear and herd mentality.

In this financial theatre of the absurd, we must be the writers of our scripts, crafting strategies that go against the grain. We must be the directors of our financial destinies, unmoved by the theatrics of the so-called experts. Their broken clocks might chime with the time now and then, but by the time they get it right, you’ll have lost everything following their misguided symphony. So, let them bray their predictions of doom, for we know that beyond the noise, opportunity awaits.

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.