Just Another Stormy Monday? Lessons from Market Disruptions

By John Reese (@guruinvestor) —

Thirty years ago, five days after 1987’s infamous Black Monday, Louis Rukeyser shared some calming and timeless words on his evening broadcast of Wall Street Week:

“Okay, let’s start with what’s really important tonight. It’s just your money, not your life.”

He goes on to list a number of life’s reassuring certainties (including warm puppies and singing robins) that would endure unfazed in the wake of the stock market’s 23 percent plummet five days earlier, on October 19th. Rukeyser also questions whether the market’s severe “indigestion” was caused by political factors or computers going “wild”, subsequently turning a “normal correction into an early Halloween.” He said, “The jury is still out as to whether the bull is dead or just badly gored,” and offered some context in the form of historical dips prior to 1987 and how the recovery periods had shortened over time.

Rukeyser’s discussion panel that evening included then-chairman of Merrill Lynch, William Schreyer. When he asked Schreyer how he might respond to the event in a few words, he immediately responded, “Don’t panic.”


The purpose here is neither to dissect the chain of events that led up to Black Monday nor to postulate whether it will ever happen again. The message is much more basic: there’s no way to predict when market upsets will occur or what will trigger them, but they are a fact of life. What investors can control, however, is their reactions to these inevitable bumps in the road and, in particular, the decisions they make as a result.

During a speaking engagement at Google earlier this year, famed investor James O’Shaughnessy illustrated the point with a cautionary tale. The story centered around his highly-intelligent, “switched-on” friend Art, who would become extremely reactive when the market rose, call O’Shaughnessy and instruct him to go “all in” on his most aggressive strategy—invariably, one which had done well over the prior several years.  O’Shaughnessy (founder of the asset management firm bearing his name) would advise his friend against the move, but to no avail. At which point, O’Shaughnessy recalled, “I would hang up the phone, get on the speaker so that everyone in the office could hear and say, ‘We’ve just called a market top.'”

Art became a bellwether for O’Shaughnessy, a contrary indicator supporting the notion that, when it comes to investing, going against the herd mentality is a prudent course. O’Shaughnessy, author of the stock market tome What Works on Wall Street, underscored the unfortunate yet predictable outcome of his friend’s approach, who applied his knee-jerk tack only with his own investments, not those he made for his children. “Five to seven years later, ” O’Shaughnessy asserted, “the kids were much richer.”

While not unusual, this type of story rarely ends well. Emotional investing will get you into trouble since, typically, by the time you want to buy-in most of the easy gains have been made and, conversely, once you decide to sell, most of the damage has been done. “We just can’t help ourselves,” says O’Shaughnessy. Human nature, he argues, leads us to predict, a tendency difficult to overcome and a recipe for trouble when shopping for stocks. It also conditions us to bolt when faced with fear or uncertainty. Back when the writing was literally on the wall, “the guy who ran away from the rustling bush,” argues O’Shaughnessy, was the one who survived and continued to evolve.

When it comes to buying stocks, it is essential for investors to value process over outcome, to understand the concrete facts about the stocks that they (or their fund manager) are choosing to purchase and the basis for their appeal. Underlying fundamentals, not headlines, lead to good investing decisions, and can help prevent jumpy investors from pulling the trigger at the worst time.

This is not a revelation to anyone who subscribes to some of the most successful investors, some of which inspired the stock screening models I created for Validea. Along with James O’Shaughnessy, gurus such as Warren Buffett strongly subscribe to this view. In fact, on the walls of the Berkshire Hathaway office in Omaha, Nebraska, Warren Buffett has seven framed copies of New York Times front pages from what he calls “days of extreme panic on Wall Street,” including the 1929 crash. He calls the display “instructive art” that shows how “anything can happen in this world.” A firm believer in keeping your cool when it comes to investing, Buffett has said, “If you’re emotional about investing, you’re not going to do well.”

So, whether we face another Black Monday at some point in the future (no one can possibly know) or just a market dip on any ordinary week day, keeping a cool head is the best course. No matter who says the sky is falling.


John Reese is founder and CEO of Validea.com and Validea Capital Management, LLC. Validea is a quantitative investment research firm and Validea Capital, a separate company from Validea.com, which maintains this blog, is a asset management firm offering private account management, ETFs and a robo advisor, Validea Legends and Validea Legends Income. John is a graduate of MIT and Harvard Business school, holder of two US patents and author of the book, “The Guru Investor: How to Beat the Market Using History’s Best Investment Strategies”. Follow John on Twitter @guruinvestor