25 Years Later: Lessons From The Crash Of '87

Oct. 19, 2012 4:16 AM ETSPY, IVV, DIA, VOO, VTI61 Comments
Jeff Miller profile picture
Jeff Miller

Friday, October 19th, is the 25th anniversary of the stock market crash of 1987. I was a mere three weeks into my new job as research director for a group of market makers at the Chicago Board Options Exchange. It was a dramatic experience. Mrs. OldProf was visiting both to celebrate our anniversary and to look for an apartment in the city. We met friends, hit some shows, and dined at Al Capone's favorite restaurant. Great fun on Friday.

On Monday, things looked a lot different. We decided to put the move from Wisconsin on hold for a little longer, not signing any leases just yet!

Fortunes were made and lost that day, sometimes the result of what seemed like very small decisions a few days earlier. Like everyone else who lived through those days, I have quite a few stories. While those are interesting, I want to focus on the lessons that might be relevant for today's investors.

Causes of the Crash

In October of 1987, there was an explosive mixture of an overvalued stock market, rampant and ill-advised program trading, and extreme over-confidence on the part of many investors. A growing trade deficit and falling dollar caused many to believe that higher interest rates were necessary. The spark seemed to occur on Friday, October 16th, 1987, with the effects rippling around the world over the weekend. Mutual funds had large sell orders on the morning of the 19th, necessary to meet redemptions.

I am sure that the paragraph above will sound to some just like a description of current conditions. I wrote it with that in mind. I suspect that you will see more than one article pursuing that theme. It is true that some problems seem to persist for decades, or to re-emerge in different forms. The exact causes of the Crash

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Jeff Miller profile picture
Seeking Alpha mourns the passing of Jeff Miller, on May 7, 2021. During his time at Seeking Alpha, Jeff attracted a following of close to 40,000 readers and published more than 1,500 articles. He was a portfolio manager at Incline Investment Advisors, LLC. Jeff also was President of NewArc Investments, Inc., and served as a university professor.....................................................................................................................................Jeff is Portfolio Manager for Incline Investment Advisors, LLC.,manager of both individual and institutional investments. A registered investment advisor, he was formerly President of NewArc Investments, Inc. Jeff is a former college professor with a hands-on, real world attitude. His quantitative modeling helped inform state and local officials in Wisconsin for more than a decade. A Public Policy analyst, he taught advanced research methods at the University of Wisconsin, and analyzed many issues related to state tax policy. Jeff began in the financial business as Research Director for a trading firm at the Chicago Board Options Exchange. He investigated anomalies in the standard option pricing models, taught classes for beginning options traders, and developed new forecasting techniques. In 1991 he established a general research consultancy, working with professional traders at all of the Chicago financial exchanges. In 1998 he started NewArc Investments, Inc. Jeff has a commitment to the specific needs of individual investors. It is not a one-size-fits all approach, but one that emphasizes the unique circumstances of each client. Jeff also serves on the board of a small technology company. He occasionally serves as an expert witness in legal cases involving financial markets and hedging.

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