It was Monday, 19 October 1987, and I thought the world of finance was ending. I remember the feeling like it was yesterday. I was a 29-year old stockbroker, living and working in New York, witnessing the biggest market meltdown since the crash of 1929.
Strangely, I met a client for a drink on the previous Friday to commemorate history being made as the Dow Jones Industrial Average had fallen 108 points. This drop capped off a 9.5% decline for the week – and the Friday point fall was the largest since the 1920s.
I was still unprepared for what would come on Black Monday – a 508 point or 22.6% fall in the Dow and carnage across global financial markets.
The Hong Kong stock market closed for a week and then crashed by 33% when it reopened on 26 October 1987. The Australian market fell 40% over the next three months.
Looking back I believe the drivers for the ’87 Crash were the imbalances caused by the unwinding of portfolio insurance, a back-up in interest rates and, as always, irrational exuberance that had driven equities to unsustainably high levels.
Lessons from '87 and the imbalances today
I have recently returned from New York after meeting with market participants in advance of the launch of WAM Global next year. When I reflect on that period and the 30 years that have followed it, some of the lessons I have learned are:
- Never panic and always take a long-term view – the world of finance did not end on 19 October 1987.
- Be patient – the Dow Jones Industrial Average only took two years to recover the loss of October 1987.
- Work against your emotions – be excited about buying when others are panicking.
- "The time to buy is when there's blood in the streets" – Baron Rothschild has been proved right after many market crashes.
The imbalances that I currently see in the market are:
- The significant liquidity risks from passive money held in open ended equity trust structures – exchange traded funds (ETFs). In the United States, ETFs have grown to $4 trillion or 16% of the equity market.
- The unwinding of a 30-year bull market in interest rates, which has driven significant expansion in price-to-earnings ratios.
- The withdrawal of excess liquidity from the global financial system.
When I established Wilson Asset Management in 1997, I did so to provide investors with exposure to an actively managed portfolio of undervalued growth companies and discounted assets. In these uncertain times, we remain steadfast in our commitment to the investment philosophy that has provided solid returns for almost 20 years.
I am incredibly pleased that Wilson Asset Management has been able to make a significant difference to the broader community, in particular through advocating for retail investors’ rights and by establishing and supporting the Future Generation companies. These initiatives would not have been possible without your support and I would like to take this opportunity to thank those investors who have been part of the Wilson Asset Management story.
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Geoff founded Wilson Asset Management in 1997, and has over 35 years direct experience in investment markets. Geoff also created Australia’s first listed philanthropic wealth creation vehicles, Future Generation.
Great read, thanks for sharing Geoff.
Good read Geoff, I think Rothchild's full quote added the words "even it is your own".