This week marked the 30th anniversary of Black Monday. There are a lot of lessons to take away from that day and the events that lead up to it (the elusive lesson for many of us is how we’d react in that instance).
For instance, Robert Shiller made an important point about the impact of putting so much focus on what everyone else is doing (emphasis mine):
The declines that had already occurred in October 1987 looked a lot like those that had occurred just before the October 1929 stock market crash. That graphic in the leading financial paper, along with an article that accompanied it, raised the thought that today, yes, this very day could be the beginning of the end for the stock market. It was one factor that contributed to a shift in mass psychology. As I’ve said in a previous column, markets move when other investors believe they know what other investors are thinking.
Warren Buffett said the same thing in his ’87 letter (again, emphasis mine):
We have “professional” investors, those who manage many billions, to thank for most of this turmoil. Instead of focusing on what businesses will do in the years ahead, many prestigious money managers now focus on what they expect other money managers to do in the days head. For them, stocks are merely tokens in a game, like the thimble and flatiron in Monopoly.
None of this is new. It’s been going on as long as markets have been around.
Stocks perform because the underlying businesses perform. For some reason that gets lost at times. When most of the focus shifts from what the business will do to what other investors will do and earn a better return than the next guy becomes more important than managing risk, it can create explosive events.
It creates a short-term mindset that feeds on itself because you have to be faster in order to beat the next guy. In the worst outcomes, it creates panic in both directions.
And avoiding it is hard. Sticking to a plan, while others around you are getting rich, is hard. Ignoring a panic is hard. Yet, it’s exactly what needs to be done to come out ahead.
Howard Marks reiterates that point in the Fall edition of Graham & Doddsville:
Most great investors stick to an approach through thick and thin, and yet every approach goes out of favor sometimes, which means that every investor has periods in the dog house. To be a great investor, you must have an approach, and you have to stick to it, despite the times when it’s not working.
None of this stuff is easy. The greatest quote in my book is from Charlie Munger, who said, “None of this is meant to be easy, and anybody who thinks it’s easy is stupid.” All this stuff is really complex. It’s easy to talk about, but it’s hard to implement.
Unfortunately, experience is the ultimate teacher. You really have to experience the tough times to understand it, know how you’ll react to it, and learn from it.
I’ve had the unfortunate pleasure of experiencing one bubble (two if you count the housing bubble) and two crashes in my lifetime, and numerous corrections along the way. Each event taught me a lesson about myself, helped shape my thought process for the next one, and made the next one easier to handle.
And Howard Marks agrees:
There’s no lesson like experience. You can read about it, and you can talk to old timers, but there’s nothing like living through it. The most important lessons in investing are learned in the tough times. I started in 1968, and we came across tough times right away, and I learned a lot of very valuable lessons.
Probably the best thing that can happen to every investor is experiencing some tough times early on. Starting early has benefits beyond compounding.
- The Crash of ’87, From the Wall Street Players Who Lived It – Bloomberg
- What Didn’t Happen on Black Monday 1987 – Elm Funds
- Lessons From Over a Decade of Managing Money Using Quant Strategies – Validea
- Risk Perception vs. Risk Profile – B. Carlson
- The Theory of Maybes – M. Housel
- A Dustin Hoffman Interview Explains Behavioral Economics – Quartz
- The Scale of Tech Winners – B. Evans
- Cryptocurrency: A Letter to Jamie Dimon – Chain
- Hash Power: A Documentary on Blockchains & Cryptocurrencies – Investor Field Guide