Lessons learnt from the ‘Black Monday’ panic
Black Monday. Market crash. The end of the world. These are just some of the comments that were being tossed around on 24 August as global markets went into sell mode. At a stage, the Dow Jones was some 10% down over two trading days while even the local Top40 Index was off almost 8% over the Friday/Monday selloff period.
While all this was happening, the rand traded at its worst level ever as it brief ly went through R14/USD, breaching the R13.61/USD worst level from December 2001.
But was it really all that bad and, more importantly, what can we learn from the frenzy?
The f irst lesson is to be sceptical; just because Twitter is screaming about a Black Monday doesn’t mean it is a Black Monday. Black Monday refers to that day in October 1987 when the Dow Jones lost 22.61% in a single day. That was a Black Monday. A day that saw 3% losses locally and some 3.5% down in the USA doesn’t compare. At most, it was overcast with no chance of rain. In fact, the sell-off we’ve seen during August has only taken our market back to levels we were at in late 2014; compared to 1987 or the more recent 2008/09 market sell-off, it’s nothing.
The real issue here is what we can learn from the panic that spread across the internet in general, and social media in particular. Here I ask you a simple question. How did you feel when you heard the hype and saw all the red on your portfolio? Fear? Indifference? Greed?
If you felt fear, then there is a problem and that problem is simple: you have too much risk. Any position in the stock market has risk in that you can lose money, what you have to do is make sure you manage that risk to a level where you can sleep well at night (we call this a SWAN portfolio). Even the simplest of exchange-traded funds (ETFs) carry risk, but that risk needs to be reasonable.
What we tend to do is take on too much risk in an attempt to get rich quickly. In some cases this will include derivatives but will also include a lot of stocks that are struggling to make profits, which we hope will turn around and zoom higher, making us a pile of cash in double-quick time.
Nice in theory, but the reality is that markets go up and down and we need to be prepared for both events. If we’re heading down, how’s your portfolio doing? Red is fine, everybody was red on the 24th. How much red and how you felt is what matters.
Have a long hard look at your portfolio and see where the fear came from and start to f ix it. Sell those dogs that you ‘ hope’ will recover but, if you’re honest, likely never will. Have an equally long hard look at the second tier of good, but not great stocks (I mean good as in business model, not price moves) and revisit why you bought them and decide whether you should really still be holding them. Then act on this and spring-clean your portfolio.
A last comment: where to next? Do we continue lower, or do we rally to new heights? The honest answer is I have no idea; in fact nobody has any idea. Sure, everybody has an opinion, but trust me, nobody can see into the future.
Traders signal offers in the Standard & Poor’s 500 stock index options pit at the Chicago Board Options Exchange (CBOE) on 24 August. Uncertainty among traders after big losses in the Asian markets caused a sharp drop in the S&P at the open.