The Ten Biggest Bubbles of All Time (Suno Authors Book 1) by Tiago Reis

Author:Tiago Reis
Language: eng
Format: mobi
Publisher: Suno Research
Published: 2020-03-30T03:00:00+00:00

The graph compares the performance of the S&P 500 index with the average stock price to earnings ratio between 1980 and 1987 (Source: https://www.federalreserve.gov/pubs/feds/2007/200713/200713pap.pdf)

The day after Black Monday, about 7 % of the stocks traded in the US stock market did not open for trade. During the opening minutes, the Dow Jones Industrial Average increased by 126 points as a response to palliative measures implemented by the Federal Reserve.

However, the rally ended at 10 am and the index started to fall again. At 11:15 am, bankers like Merrill Lynch and Goldman Sachs asked the CEO of the New York Stock Exchange to stop trading because there were no buyers. At 11:28 am, the Chicago Mercantile Exchange stopped trading S&P contracts. In total, the Dow Jones Industrial Average gained 102.27 points on the Tuesday following the crash.

Key lessons of Black Monday

While the Stock Market Crash on Black Monday ruined many investors, the day also left lessons for investors and regulators. Short-term solutions, such as Circuit Breakers, were introduced to stop sudden price fluctuations. Portfolio insurance programs were regulated by the authorities.

The main lesson for investors was that investments should be distributed among companies from different sectors to minimize risk to a specific sector. Controlling emotions was another important lesson for investors. Even during the Stock Market collapse in 2008, the investors maintained their faith in the financial system to remain calm as short-term corrections in the market rebounded within a year and headed toward new highs.

Investors learned that the short-term and long-term market falls are temporary. The data proved that many steep rallies were preceded by a sudden market crash. Even during 2015 and 2016 declines, the market soon recovered to reach new heights.

With the increasing use of trading technology, many market declines were observed. This is mainly due to high-frequency trading, which can move large trading volumes and increase the chances of volatility during the panic sale. The best way to deal with this situation is to adopt a long-term investment strategy. Although many people panic during a downturn, an investor with a long-term vision remains confident as long-term strategies are based on personal investment goals with little portfolio turnover.

According to statistics, those who have remained in the New York Stock Exchange for long periods, since 1857, have averaged returns of 10% per annum.

Every market crash is an opportunity to buy cheap when most people are selling. Long-term investors need not constantly monitor short-term stock market events. Short term events are difficult to predict and should be ignored by long term investors.

Changes in regulatory procedures after Black Monday

During the 1987 Stock Exchange collapse, economists and financial experts opined that the decline was mainly due to panic selling, operating system, and procedures related to news reporting.

To avoid these failures again, SEC approved certain initiatives led by the New York Stock Exchange and the Chicago Mercantile Exchange. These initiatives included coordinating the stock and futures markets, exchanging communications between the stock and futures markets, and sharing audit trails and statutory information.

This was

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