Bay Area man’s trade signaled end to ’87 crash
Thirty years ago this month, the stock market experienced a single-day plunge equivalent to a 5,100-point drop in today’s Dow Jones Industrial Average. It amounted to a 22 percent drop in value, the worst since 1914.
In general, we know today that computerized trading models, creating what was known then as “programmed trading,” essentially faked each other out. Consider something like “Hal,” the computer in the movie “2001: A Space Odyssey,” bidding against several electronic “brains” in a race toward the bottom, which only ended when markets were shut down.
A day later, the only market still open was the Chicago Board Options Exchange, and the board of directors was meeting upstairs over the trading floor of the exchange. One board member told me, years later, the story about the argument over whether to close the CBOE or leave it open. It was academic because down in the “pit” where the usual cacophony of shouting created the bidding process, the floor was deathly silent. As they argued, an options purchase trickled across the ticker in the board room, and the call went down to find out who had just made that trade.
A Chicago transplant from Piedmont, Blair Hull was the buyer.
Several years later, The Wall Street Journal published a short article acknowledging that there was still no conclusive understanding of what caused the crash. What they did know, however, was the event that marked the bottom. This was when an “unidentified trader” walked onto the floor of the only exchange left open and made the first purchase, which marked the beginning of the stock market run averaging a 15 percent gain per year — a run that lasted through the ’90’s.
That crash gave birth to the financial product known as the ETF, or exchangetraded fund. It was prompted by what the U.S. Securities and Exchange Commission perceived to be a need to have an index that would be priced from minute to minute throughout the day.
In simple terms, an ETF is a publicly traded company that buys other companies. This is similar to, say, Berkshire Hathaway, the public company that owns both private companies as well as stakes in publicly held ones like Coca-Cola and Wells Fargo. Berkshire’s stock price varies throughout the day from second to second based on what the public thinks the stock is worth.
An ETF is similar, but only to the extent that it owns only publicly traded companies whose share prices, in turn, are changing by the second. Because the record keeping is a challenge and needs to be done electronically, ETFs are all index funds representing a cross section of the market rather than a fund that is buying and selling securities throughout the year. The first ETF was a 500 index — a cross section of the 500 largest publicly held companies. At any given moment, the share price of the ETF could be worth more or less than the combined value of the shareholdings as supply and demand for the index as a whole determined the ETF’s price.
A conventional mutual fund, by comparison, is valued just once at the end of each day and represents the combined closing share prices and holdings of all the investments of the fund.
Over 30 years, ETFs have morphed from just a 500 index to hundreds of different indices. The list of top performers includes such specialized funds as those investing in agriculture, precious metals, base metals, gold, consumer staples, consumer discretionary, health, natural resources, and other so-called “select industry” funds.
For an investor searching for more diversification, a mix of ETFs can be part of the answer. However, the daily share prices of these funds can bump up and down while a mutual fund equivalent only changes once at the end of the day. The ETF’s volatility, then, reflects the “voting machine” of stock traders to a greater extent than the “weighing machine” of income statements and balance sheets that dictate the choices of mutual fund managers.
In John Spooner’s book, “Do You Want to Make Money or Just Fool Around?” he asks the question we all need to ask when we consider this newer, comparatively exotic financial instrument. Proceed with caution and do some research on how they differ in many respects from mutual funds that have withstood the test of time.
Blair Hull, for what it may be worth, went beyond the trade marking the end of the ’87 panic. He and his family went on to set in motion what became women’s right to greater representation in college sports under Title IX legislation. On YouTube, you can listen to his commencement address at UC Santa Barbara delivered earlier this year.
Steve Butler is the CEO and founder of Pension Dynamics Company LLC. To read past columns and learn more about his book, visit www. pensiondynamics.com and click on resources. Steve can be reached at 925-956-0505 ext. 228 or sbutler@pensiondynamics.com.