The Day the Dow Dropped 3,116 Points

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 25 years ago today the stock marketcollapsed—and I mean collapsed in the full sense of the word: on Monday October19, 1987 the Dow Jones Industrial Average fell 23%, or 600 points. And while 600 points may not sound like muchthese days, 23% into today’s equivalent is 3,116 points. 3,116 points. Get your mind around that, asWarren Buffett would say. In any event, I was on Wall Street(figuratively speaking—I worked mid-town) that day, at a money management firmof which I have very fond memories.  Itwas a great shop, with a great client base (families mainly—this was in thedays before fund-of-funds, ETFs and all manner of dis-intermediaries betweeninvestors and investments) and money managers with a real eye for investing incompanies (as opposed to buying stocks, which is an entirely differentmindset). Every time I pitched an idea—I was ananalyst—one of the portfolio managers would start nodding and say, “Oh, I havea client who used to compete with them,” or “One of my clients sold out tothose guys”…and then I would get a lesson in how that particular company actuallymanaged itself behind the façade of quarterly earnings and black-and-white SECfilings.   It was a great shop. Anyway, by the time Black Monday came, we’dbeen getting strange vibes about the stresses building up in the market—notbecause our clients were day-trading types who had been caught up in the pre-Crashmania, but because they weren’tday-trading types, and yet here we were a week or so before the collapsegetting hit with all manner of redemption requests.  The pressure built so quickly that the Fridaybefore Black Monday I heard we’d been selling stocks overnight in Japan to raiseliquidity for somebody.  And we weren’t a“sell overnight in Japan”-type place.   I thought “Well if it’s this bad for ourclients, Fidelity must be a basket case.” So Friday afternoon I sat at the Quotronmachine (look it up, kids) and began hunting for the highest-multiple, mostconsumer-sensitive stock I could find. It turned out to be Home Depot, which was sort of the Lululemon of itsday. And I shorted Home Depot.  Not alot, but just enough to hedge my owninvestment portfolio.  Then I went homefor the weekend, which is when everything came unglued.
 What I remember about Black Monday mainly washow quiet it was (this was pre-CNBC, pre-Internet, pre-cell phones), at least for those of us in the business not screaming our guts out and waving tickets in a scrum on the floor of the NYSE, like the specialists trying to make markets that panic-stricken day.
 Our trading room (nota big one—we only had three traders) was more like a funeral parlor.  Portfolio managers drifted in, arms crossed,and looked over Roger or Donna or Mary’s shoulder at the screens, shook theirheads, muttered something like “Whatis going on” and left the room to getback to the calls from their clients who were asking the same thing.  I had lunch with another analyst at aJapanese sushi place in mid-town—it was a nice break from what seemed like theend of our world as we knew it—and tried to think through the implications,secure in the knowledge that, however badly it all ended, I had shorted HomeDepot, so my own portfolio was hedged. Otherwise, that day and the days after BlackMonday are a blur.  NASDAQ brokedown—quotes didn’t mean anything—and the shock to the system seemedirreparable.  All manner of strategistscame through our offices over the next few weeks and months, trying to explainwhat had happened and what it all meant.  The only one I remember—the only one who madeany sense—was Larry Kudlow.   Yes, theCNBC Larry Kudlow.
 In those days Larry wasa Wall Street economist, and quite a good one.  AndLarry sat at the head of our conference table with a group of stunned and scared portfolio managers and analysts, and he said, and I can still quote him because the sentencewas the only crisp, clear thing anybody said at the time: “What we had was agood old-fashioned liquidity crisis.  Itstarted with the Fed tightening and was precipitated by portfolioinsurance…”   And he went on to explain why the Fed was doingthe right thing (easing like crazy) and the world would come out in goodshape.  He was the only strategist whosaid that, and even though most of us thought he was a cock-eyed optimist, it turned out he was the only strategist we met that fall who had it dead right. In any case, our firm did remarkably wellcoming out of Black Monday.  The dayafter the crash, the principals had called a meeting and said to all us analysts, “Give us your single best company.” And then they walked out of the room and bought each one of those stocks for the firm, at a time when everyone else on Wall Street was too scared to buy anything but hard liquor and a chaser. Me, I closed out my Home Depot short, feelingpretty good about it.  The stock fell 25%on Black Monday and bottomed 30% off the price where I’d shorted it.  I bought the stock back some time that week,feeling pretty slick that I’d had the foresight to hedge myself by shorting oneof the most popular stocks of that era. Of course, Home Depot has come a long waysince then.   Last night it closed at$61.80. Where did I short it way back in October of1987?   Well, I shorted it at the split-adjustedequivalent of $0.70 a share, and bought it back at around $0.50 a share. Which means, genius that I am, I sold Home Depot for less than today’sannual dividend of $1.16 a share. And that’s why, when I tell my grandchildrenthe story of Black Monday, I’ll be leaving out the part about Home Depot.
Jeff MatthewsAuthor “Secrets in PlainSight: Business and Investing Secrets of Warren Buffett”(eBooks on Investing,2012)    Available now at Amazon.com
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