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In the previous post, we gave an introduction of how greed and fear can cause massive havoc in the market.

Today, I’ll go in depth, and do a case study of emotions gone wild in the market - and the resulting destructive effect!

Before we touch on that, let me share you a quote by Sir John Templeton, the legendary investor of Templeton Growth Fund’s fame - “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”

Wise words indeed!

If you notice, the stock market history is a never-ending cycle of boom and busts. And when we speak about boom and bust, few come any bigger than…

Monday, 19 Oct 1987…

 

That fateful day, also known as the ‘Black Monday’, saw the second largest one-day percentage decline in stock market history. Ever.

The S&P 500 fell 20.5% while Dow plunged by a monstrous 22.6%!

The carnage was not limited to the United States alone. The intense fear and panic was elsewhere, spreading without mercy. Regional markets such as Hong Kong, United Kingdom, Canada and Spain all took crushing losses of an average of 22% by the end of October.

Pandemonium was rampant as fearful investors rushed to exit the market. The huge exodus of cash out of the stock market only served to force the market index down further.

There was chaos everywhere. Traders were spooked. Investors were scared out of their wits. All they thought about was damage control.

 

Can You See How Deadly Fear Can Be?

 

It can cause an investor that is usually rational to drop everything in an instance. When market act irrationally as a whole, there’s complete chaos.

If anyone had any sense to stand back from the madness and think calmly for a moment, throughout stock market history, such crashes are usually short-lived.

In such cases when irrational exuberance rear it’s ugly head, it is…

The Perfect Opportunity To Make Money!

 

Look, fundamentals don’t disappear overnight. The fact is most crashes are the result of the market acting emotionally as a whole. Sense is thrown out of the window - but for that moment and period only.

Now, if someone just had the presence of mind, to scoop some shares of blue chip companies (think banks with strong government backing) with rock solid fundamentals at rock bottom price, how much money will he make when the market inevitably regains it’s rationality?

I bet you it will be substantial.

How many people will actually do that? Very few.

Even if you ask me, I might not do it. After all, I’m also human, and I’m affected by fear just as everyone else is.

All these “long established and sensible” theories such as the efficient market hypothesis suddenly don’t make sense anymore.

If even professors and high flying managers can make a mistake, where does the average retail investors?

 

Emotions…

 

The fear. The greed. The hope. An investor’s worst enemies.

When will we ever learn? I guess never, as human nature never changes.

But there will always be someone out there, who is standing calmly outside, waiting to make contrarian move - and profit at the crowd’s expense.

The question is - will that be you? Or will you be part of the crowd?

 

Play It Smart,

Jag Foo

Chief Editor

StocksForGrads.com

This article is available as a PDF Download

“Case Study - Black Monday (1987)” PDF Download

 

tag:1987 Black Monday Dow Jones Investment Psychology Investor Emotion Investor Psychology Stock Market Stock Market Crash

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