History repeating
While periods such as these can be deeply concerning, the truth is they actually happen quite regularly.
With this in mind, MLC’s keynote magazine decided to speak to three people who have been through other market meltdowns throughout history.
In this extract, keynote speaks to MLC Senior Investment Specialist, John Owen, about his experience of the 1987 Black Tuesday Crash.
“In 1987 I was head of Australian equities at another major investment firm. The climate leading up to October was very buoyant, very optimistic,” he said. “There were some pretty remarkable results recorded in the lead-up to the crash. I remember apologising to one client for a 45% one year return.”
Mr Owen also remarked on the importance of several initiatives undertaken by the new Labor Government at the time which deregulated Australia’s financial system.
Moves such as the floating of the Australian dollar and the granting of licences to foreign banks helped transform the environment for investors. However, even in this climate there were warning signs that a major market event was on the cards.
The Australian market was awash with companies of varying quality and substance who, in share price terms, were doing well in the speculative market environment.
Gold companies capitalised on the boom in prices and were being valued at dizzying prices before they had even begun to mine. And so-called ’second board’ companies emerged. While too small to feature on the main market boards, they were enthusiastically targeted by investors.
“To some extent we were concerned, but nobody was really certain. There was evidence of lots of speculative activity in the sharemarket at the time,” he said. “For instance, this was the period of the corporate raider and the entrepreneurs; the likes of Christopher Skase’s Qintex and Alan Bond’s Bond Corporation. They were both the predators and the market darlings of the time.”
Black Tuesday
“I remember that day very well,” said Mr Owen. “I was at home, having my breakfast and heard on the radio that the American sharemarket had fallen 30 or 40%. I thought it was a good idea not to have that second piece of toast, and made my way to the office as quick as I could.”
Although the crash is remembered as Black Tuesday in Australia, it was a Monday in New York. While we were blissfully asleep, markets were in freefall in America and Europe.
“The investment team got together before the markets opened and reviewed what had happened overnight in the US and Europe,” said Mr Owen. “From that perspective, we knew we were going to be hammered when the markets opened at 10 am. We waited for the tidal wave to hit us when markets opened. And hit they did. I can’t remember the number, but it was down in the blink of an eye, something like 30 to 35%. It was very sudden, very quick.”
Mr Owen’s team had an objective of raising cash in their diversified portfolios. What they discovered was even in that market of panic and uncertainty, they were still able to trade blue chip shares. By contrast, some of the previous market darlings – the small board companies, the highly leveraged corporate raiders – couldn’t be moved, and in the years that followed, many collapsed.
Baptism by fire
In the weeks and months afterwards, the market remained volatile, hitting its lowest point on 11 November 1987. MLC’s multi-manager process had only been in place since 1985, so the Black Tuesday crash was a mighty test early on in the piece.
“To me, the fact that the MLC approach survived that challenging period and thrived afterwards says a lot about how robust the underlying investment process is,” said Mr Owen. “It’s interesting to note there’s really only around a dozen balanced funds that were around in the mid 1980s that are still here today.”
Mr Owen sees many lessons learned from the events of ‘87 which are particularly vital for investors today.
“The first thing investors have to truly understand is the risks that they are taking. There are two parts to the investment equation: risk and return,” he said. “You have to weigh up both. By all means take on risk, because risk can help you generate good returns. But only take on those risks you understand, that are consistent with your own preferences and suit your objectives.”
Mr Owen also emphasises one of the ‘golden rules of investing’ as a key learning from Black Tuesday.
“We say it often, but it’s so important: it’s time in the market, not market timing,” he said. “You need to give markets time to work their magic. It’s worth pointing out that investors who had been in the Australian market for the three and five years before the ‘87 crash were still well and truly ahead even after the impact of the crash was factored into their returns.”
Finally, Mr Owen believes the power of a realistic, long-term approach should never be underestimated.
“You should never have to apologise for investing carefully. Your friends may at times be enjoying much higher returns than you are, but they are probably taking higher risks than you,” he said. “Risks can be rewarding in good or buoyant circumstances when the economy and the markets are doing well, but they can bite you in unexpected ways in more difficult periods of time.”
Extract taken from keynote, issue 20, 2008
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