Is It Possible?

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Oct 19, 2006 4:54 pm

It was nineteen years ago today that the Dow lost close to 25% of its value in a single day.


Is it no longer possible that the Dow could lose 25% of its value in a single day?


If it is no longer possible, what has changed?

Oct 19, 2006 4:56 pm

You are the definition of pathetic.... You truly have nothing else to do with your time do you???? Oh my...

Oct 19, 2006 5:03 pm

Can't answer the question?

Oct 19, 2006 5:12 pm

Of course it's possible...the only thing that seems not to be possible is that you'll go away!

Oct 19, 2006 5:15 pm
Indyone:

Of course it's possible...the only thing that seems not to be possible is that you'll go away!


Go away?  I just joined the forum this afternoon.  Why are you so unwelcoming?

Oct 19, 2006 5:17 pm

Keep up the good work - 11 posts in less than a day.

Oct 19, 2006 5:18 pm
Devil'sAdvocate:
Indyone:

Of course it's possible...the only thing that seems not to be possible is that you'll go away!

Go away?  I just joined the forum this afternoon.  Why are you so unwelcoming?


...aw shucks newbie...I didn't say that I necessarily WANTED you to go away (although I'll have to admit that thought has crossed my mind in the past)...just that I didn't believe that you WOULD go away.  You show surprising resiliency, to say the least!

Oct 19, 2006 6:47 pm

Yeah, I think people who invested on 10/18/87 are really hurting today.  That $10k they put to work in the S&P 500 index fund is only worth about $60k today.

Oct 19, 2006 6:54 pm
Devil'sAdvocate:

It was nineteen years ago today that the Dow lost close to 25% of its value in a single day.


Is it no longer possible that the Dow could lose 25% of its value in a single day?


If it is no longer possible, what has changed?



Collars.

Oct 19, 2006 6:55 pm
Cowboy93:

Yeah, I think people who invested on 10/18/87 are really hurting today.  That $10k they put to work in the S&P 500 index fund is only worth about $60k today.


Are you saying that $10,000 invested today will be worth $60,000 in 2026--or are you using 20/20 hindsight?


Does past performance indicate future results?

Oct 19, 2006 9:03 pm

Is it no longer possible that the Dow could lose 25% of its value in a single day?




yes it's no longer possible. there are circuit breakers in place. if the market's down too much too soon, they shut everyody off a put them in the penalty box to go think about how stupid they would be to react and sell their long term holdings at a 25% discount.

Oct 19, 2006 9:11 pm
Pants:

possible. there are circuit breakers in place. if the market's down too much too soon, they shut everyody off a put them in the penalty box to go think about how stupid they would be to react and sell their long term holdings at a 25% discount.



That's a good point--however the circuit breakers only stop a decline in one day.


It is certainly possible for the market to lose 25% of its value as quickly as the circuit breakers will allow.

Oct 19, 2006 9:24 pm
Devil'sAdvocate:

That's a good point--however the circuit breakers only stop a decline in one day.



You asked if the DOW could lose 25% in one day. The answer is no, it can't.

Devil'sAdvocate:

It is certainly possible for the market to lose 25% of its value as quickly as the circuit breakers will allow.

And your point is ...what?  The market can (and will) do whatever it wants to do.  That's nothing new.  Prudent money management strategies will protect profits and limit losses, no matter what the market does.

Oct 19, 2006 9:36 pm
mktsystms:
Devil'sAdvocate:

That's a good point--however the circuit breakers only stop a decline in one day.



You asked if the DOW could lose 25% in one day. The answer is no, it can't.


[quote=Devil'sAdvocate]


It is certainly possible for the market to lose 25% of its value as quickly as the circuit breakers will allow.[/quote]


And your point is ...what?  The market can (and will) do whatever it wants to do.  That's nothing new.  Prudent money management strategies will protect profits and limit losses, no matter what the market does.


Which mutual funds are going to engage in short selling?  How about put buying--how many mutual funds have as one of their objectives to manage money with the use of long puts?


Fund managers are required to manage their portfolios using techniques and strategies that are determined by the shareholders.  A fund that buys puts is going to vastly underperform in a bull market and will at best hold their own in a bear market.  In order to profit in a down market you have to sell short, and the Investment Company Act of 1940 forbids mutual funds from selling short.


Most firms will not allow qualified money to be placed into hedge funds--so the harsh reality is that most customers are going to take a bath in a bear market unless they go to cash.


If you're a compliance officer you get very nervous with the thought of a plaintiff's attorney getting a broker to admit that the strategies being employed by the hedge fund could result in unlimited losses--do you think it's a prudent idea to take retirement funds and invest them in such a way that unlimited losses can be suffered?


Things that you can do in your personal account are not allowed as a broker.

Oct 19, 2006 10:19 pm
Cowboy93:

Yeah, I think people who invested on 10/18/87 are really hurting today.  That $10k they put to work in the S&P 500 index fund is only worth about $60k today.


Cowboy, not to throw you off your horse but investing on 10/18/1987 would have been a pretty good trick considering it was a Sunday. The market meltdown was on Monday.


I'm not trying to bust you on this, I know what you are driving at. But it does serve to help me make a point about how out of context your example is. Your example is made with the 20/20 hindsight that all an investor need do was to hold. Yet, at the time there was no modern market history to justify holding. In fact, the last bear market had been long and brutal. Memories of the Nifty Fifty and 1929 gripped the markets. At the time the question wasn't whether the market was a buy or sell, it was, is the economy going to to topple over into another great depression? The fed immediately began pumping liquidity into the banking system to make sure that didn't happen. But I gotta tell ya, we all held our breath while we waited for the ship to slowly right itself. There was so much fear, if the fed didn't get it right, life was going to change. Meanwhile the market gyrated wildly and the rumors flew.


The decline in the market preceeding the crash started in August 87. The week before the crash was nothing but down. The Friday before the crash was largest single point decline in market history up to that point. I remember thinking who ever thought up "Thank God it's Friday" had a point. I left my office at 10pm after contacting as many clients as possible to hand hold and brace for the next week. The work was already done, stop loss orders in place. Some had filled on Friday, A Godsend in retrospect. Anyone with any knowledge of the markets didn't sleep a wink that weekend.  Monday hit with the force of a sledge hammer. Black Monday. Did you know that a stop loss doesn't have to be executed at the stop price? Millions of people didn't, including many of my own clients. In retrospect most knew it, it was just incomprehensible. It was new ground. It took my firm days to reconsile the orders and me days to explain how our carefully laid out risk management program had failed. Fun days as I recall. Screaming clients. Crying clients. All confidence in the stock market was lost.


The fear and uncertainty of that time was real. You could touch it. My own firm, Paine Webber went to something like a 17% equity weighting in its asset allocation model. A giant 'Keep Out" sign so to speak. There was no historical perspective to hang our hats on. No modern portfolio theory to guide us. Not that these things would have made a difference.


Noone was buying anything for the weeks and months preceeding the crash because the market was on a slide. Holding after the crash was case by case. It's tough to tell a client to stay in the water when your own firm is screaming "SHARK." There was no staying in after this thing happened. The fear, the media working OT, way too much to fight. No mass exodus within my own book. But lots of damage. I started buying bonds and then in December jumped back into the market with both feet. Still, on a personal note, I cancelled the Porsche 911  I had ordered. 1988 was gonna be a tough year. And it was.


In 1988 what I found  mostly were the walking wounded and those who would tell me never again. By 1989 my cold calling couldn't uncover anyone who'd lost money in the crash. I'd purchased a list of investors who'd managed to avoid the crash by selling out just before. Apparently, I with my clients were the only people on the planet to lose money in the crash. Human nature, you can't beat it for entertainment. Later that year the S&L crisis was looming and the real estate market went into the tank in an unpresedented way. More fun times.


So when you say anyone who invested on 10/18/87 and stayed invested would have been Ok realize that there is no such person. And if you say that to anyone who was there you're going to lose all credibility. It's easy to say woulda/coulda/shoulda from the comfort of a 19 year perspective. It's another to say it when it's your ass on the line in real time.


Could it happen again? Youbetcha!

Oct 19, 2006 10:20 pm

DOW can never go down that much. If something drops they swap it with another. Someone posted what has happened over the past 10 years and it makes you think.



Anyone see the new MCD cafes'?

Oct 19, 2006 10:31 pm
Devil'sAdvocate:
Cowboy93:

Yeah, I think people who invested on 10/18/87 are really hurting today.  That $10k they put to work in the S&P 500 index fund is only worth about $60k today.


Are you saying that $10,000 invested today will be worth $60,000 in 2026--or are you using 20/20 hindsight?


Does past performance indicate future results?



Yes, if you happen to be still another incarnation of he who shall remain nameless.

Oct 19, 2006 10:41 pm
Devil'sAdvocate:

In order to profit in a down market you have to sell short, and the Investment Company Act of 1940 forbids mutual funds from selling short.


I didn't realize that.  How do you explain long/short funds?

Oct 19, 2006 10:43 pm
Indyone:

I didn't realize that.  How do you explain long/short funds?



I believe you'll find that they are hedge funds, partnerships, rather than investment companies.

Oct 19, 2006 10:55 pm

I'll need to look more into long/short funds.  According to what I just read there are thirty or so of them and they are considered mutual funds.


A few years ago the ICA was modified to allow managers to be compensated as a percentage of portfolio performance if several stringent qualifcations were met.


It could be that at that time the ICA was also modified to allow certain fund families with certain experienced managers to engage in short selling.


From what I'm reading it seems that they, long/short funds, are not as liquid as a traditional fund and many of them have rather high minimum buy ins.


I'd be interested in hearing if anybody is using a long/short fund with qualified money--I would think it would be a compliance officer's nightmare.