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1987 Crash Revisited
Posted By Barry Ritholtz On October 15, 2007 @ 2:30 pm In Investing,Markets,Psychology,Trading | Comments Disabled
Rob Fraim is a reader of mine who puts out his own
amusing comments each day via email. On the 17th anniversary of
the 1987 stock market crash, he put out his recollections from that
day, and we are republishing them today, the 20th anniversary of Black Monday.
I found them so interesting that I suggested Rob (who is
blogless) post them here. He gladly agreed. Without further adieu, here
is Rob’s version of 1987 Crash Revisited
October 19 – the day that each year gives old-timers in this business a renewed facial tic and post-trauma flashbacks.
“What?” you say. “You mean you were actually there, Grandpa? You remember the Crash of ’87?”
Yes, I was, and yes I do. Confirming rumors that I am, in fact,
older than dirt I note that I was in this business in 1987 – and had
been for a few years prior (I started in 1983.)
I was having dinner last week with a friend who runs a hedge fund
(another graybeard, although he looks younger than me) and we ended up
talking about 1987. He had a great story about the whole thing (which
I’ll let him tell you about someday if you ever get to have dinner with
So I thought I would take a moment to reflect on my own Crash
Experience – and perhaps some of you will share your October 19, 1987
story (provided you’re not a whippersnapper who would be relating what
was on freakin’ Sesame Street that day! I really hate you guys.
You’re svelte and unwrinkled and smart and energetic and I’m just
liable to whup you if you’re not careful.) Maybe we’ll even get a
recounting of the aforementioned dinner tale from last week. So if you
feel like it, drop me a note with your recollections. If I get enough
to make it worthwhile, perhaps I’ll compile them for sharing.)
“What I Did During the War (or What Felt Like One Anway)” or…
“Dr. Strange-Broker or How I Learned to Stop Worrying and Love the Bear” by Rob Fraim
I was 29 years old, 4 years in the business, with two young
children. I thought I had investing figured out, didn’t really, and
was working for the old Dean Witter (now Morgan Stanley.) The market
had been mostly good during my relatively brief time in the business
and I had survived the crucial new-guy starvation years and had built
up a fairly good book.
So good in fact that I listened to my manager – an advocate it turns out of the “if-you-get-the-brokers-to-really-get-themselves-in-hock-they’ll-be-
forced-to-produce-more-just-to-pay-their-bills” school of thought. (He was also the genius who kept telling us to forget about analyzing stocks ourselves. “Look,
we pay those analysts in New York a lot of money to do that. Do you
think you know more than those guys? Your job is to sell.” He is no
longer in the business, by the way. Last I heard he had left his wife
and family and was involved in a relationship with a New Age guru type
who had helped him to discover his true “orientation.” He’s raising
llamas with this guy and chanting or something. But I digress.”
“You need a new house” he said. “That “piece of#%@ little house of yours isn’t enough. You need to aim higher. Think bigger.” Actually a new house seemed like a pretty good idea, and the kids were getting bigger, and business was good, and hey…what’s a little extra mortgage to a hot-shot like me?
I pasted a picture of a big house on the door of my little office (thanks to the suggestion of my motivational coach in the big office) and embarked on the quest to get me some o’ that.
Before too long I was closing on a house that was twice the size of the old one and came complete with a mortgage that was only 3 times as large. Coolio!
We closed on the house on October 1, 1987.
Oh sure, the market had been a little funky. After peaking in the summer, the market had gone through a pretty good decline – from about 2700 to 2300 or so. In percentage terms, not an insignificant sell-off. But of course it was just: summertime doldrums, a little readjustment, things a little ahead of themselves, no problem, secular bull market, great buying opportunity, hey just look – now we’re getting a second chance at bargain prices.
And don’t forget: “We’re paying those guys in New York a lot of money.”
On Friday October 16, three of us brokers decided to play hooky and “have meetings scheduled” that afternoon. It was one gorgeous fall day. (By the way, for those of you in other locales – particularly you concrete jungle folks – I heartily recommend my neck of the woods in mid-October. The lower Shenandoah Valley of Virginia – smack in the middle of the Blue Ridge Mountains – is a great place to be when the air turns crisp and the trees put on their autumn show. Drop in sometime. I’ll buy you a beer.)
Making the turn after the 9th hole we stopped in the clubhouse to use the pay phone and call the office (pre-cell phone days you youngsters) and my buddy came back looking a little stunned. “Down 90,” he said. Of course these days 90 points doesn’t mean that much. But down 90 from 2300 was a drop. “It’s over” he went on. “The party’s over.”
The weekend was a little tense, since we knew that Monday would open weak. An understatement as it turned out. The combination of a Treasury Secretary with a big mouth and what was called “portfolio insurance” (which somehow involved the commandeering of the free market system by that crazed computer from “2001 – A Space Odyssey” ) came together in an incredibly imperfect storm.
At some point during the day a strange, battlefield-giddiness sort of took over and we just…all….laughed. It was so surreal that all you could do was just laugh. Mortar shell…giggle…another bomb…chuckle. As the day went on, clients were trying to make moves – a lot of panic selling of course, along with more buying interest than you might imagine. There was one small problem though – the systems just crashed. Market orders, limit orders, stop orders – all in, but no reports.
“Are we filled?”
“Should we re-enter the order?”
“Don’t know – it could have failed and you need to re-enter, or you could be duping a trade.”
“When will we get reports?”
“Any minute now.”
As it turned out it was days later in some cases – and a nonsensical mix of nothing dones, good trades, and fills that were two points or five points away from where you figured they should be. As the day went on and we approached down 500 we were really trying to do some buying. But there was no way to know what, when, if, and at what price trades were filling.
In a strange little wrinkle, I figured out something about the Dean Witter system that day. Back then there was an odd-lot order execution system at Dean Witter. If you put in an order for less than 100 shares close to the limit where it was trading, the system would automatically fill it (internally, not actually on the exchange) and then almost simultaneously fill it on the exchange so that the system was flat on the position. By chance, one of the orders that I put in during the period where executions weren’t being reported was for 70 shares of something or another. Boom. Instant fill. So the next order for 400 shares or whatever it was – went in as 99-99-99-and-3. Boom, boom, boom, boom. I became king of the odd lots for about a day until they wised up and shut the auto-fill system down.
On Monday night, the manager made an evening shift mandatory.
“Call your clients. Tell them what’s going on and what to do.”
“Uhhh….what is going on and what should they do?”
…..I don’t know. Tell ‘em to buy or sell something.”
His other fabulous idea was to call lots of people that weren’t clients of the firm and act like we had told everybody to get out before the crash and then talk them into transferring their accounts. Oh he was prince of a guy all right. I hope he and Serge and the llamas are happy.
That was October 19, 1987. I went home late and stared at all of my new walls. I had a lot more of them than just a few weeks earlier. And the first (tripled) mortgage payment was due on November the 1st.
In the days after the October 19 crash things did stabilize a bit – even rallying some. Corporations stepped in with real buybacks (not the maybe-someday ones we see so often now.) The Fed flooded the system with liquidity and somebody unplugged the hell-spawned computers. The trading systems got back to working and we commenced to explaining why market orders (and limits, and stops) never filled – and more importantly we had the opportunity in the cooler non-panic moments to actually make recommendations and help people figure out how to proceed. “And of course you bought everything in sight since it was the buying opportunity of a lifetime, right Grandpa Rob?” Well, yeah, we did some good buying to be sure. But hand-over-fist-with-reckless-abandon-because-we-knew-for-sure? Well, I wish we had been that smart. But by the time the systems came back in full function we had rallied a couple of hundred and it was awfully hard to find anyone who wasn’t warning of the Impending Great Other Shoe. So yes, we bought, and bought strong, but not as much as hindsight would dictate.
And what most people forget is that the market made its low, not on October 19, but a couple of months later in December. It’s always simple looking backwards, but tougher at the time (as it was in the 1989 United Airlines-related mini-crash, the Persian Gulf war, the 1994 baby bear, the Long-Term Capital mess, the Russian crisis, post-9/11, etc. Or today for that matter.
At the risk of being called a Pollyanna or a head-in-the-sand type, here’s an interesting little exercise. (And you folks know me, and you know my reasonably cautious market stance at present. I have a long bias and am fairly constructive on the market, but my present “play some defense” mode is well documented. And I’m old and feeble and decrepit, so I’m not a reckless sort anymore.)
But take a look at this chart. Pick out 1987 — The Great Crash of our generation. And then 1989 (or 1994 or…)
Oh…you needed some dates (and a microscope) to help you find them?
Kind of interesting to look at things from a longer-term perspective sometimes huh?
Anyway kids, that was a day in the life of Young Rob, semi-new broker in 1987.
How about you? Care to share your Crash Day story? (Use the comments below to post . . .)
I’ve gotta run now. Business is pretty good. And I have a meeting with my real estate agent about this house I’ve got my eye on.
The smart guys in New York say it’s all good. And never forget: we pay them a lot of money.
by Rob Fraim
Rob Fraim  is a broker and consultant with Mid-Atlantic Securities, Inc. – serving the investment needs of institutions and high-net worth individual clients nationwide. A 21-year veteran in the investment industry, he lives and works in Roanoke, VA.
To receive his daily commentary, send an email with the word "subscribe" in the subject line to Rob Fraim .
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