Lessons learnt from the ‘Black Mon­day’ panic

Finweek English Edition - - INVEST DIY - BY SI­MON BROWN

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.

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