Black Monday

The London Paper  –  15 Oct 2007

‘History teaches us that history teaches us nothing’ wrote the great German philosopher Frederick Hegel almost two hundred years ago. If he were still philosophizing today and he analyzed ‘Black Monday’ (the stock market crash that happened twenty years ago this Friday) he wouldn’t change his view at all. Despite the passing of two decades no-one really understands what happened on 19th October 1987 with ‘experts’ blaming things as diverse as programme trading, the UK hurricane, shares’ over-valuation and a lack of liquidity. Some old lags in the City are a little nervous about this anniversary but a few work-mates and I are going to defy fate and have a commemorative drink. Over a few glasses of shampoo I intend to convey the following lessons Black Monday has taught us – some of which may not go down too well:

1) Never trust ‘the experts’. Essentially, no-one predicated ‘Black Monday’. Frankly, if all the so-called stock market experts were laid end to end … I’d be in favour of it.
2) The stock market is a lottery and can be as irrational as my mad auntie Beryl when she’s been on the sherry all day. Some superstitious people refuse to invest in October after the 1929 and 1987 crashes… and Stock market historian David Schwartz will tell you this tendency helps mean that shares tend to underperform this month.
3) Herd mentality rules. Human behaviour dictates stock markets and humans can panic. Several clichéd City phrases such as ‘the trend is your friend’ actually promote so-called momentum trading. Bucking the trend is generally about as wise as putting your knackers in the care of a scissors-wielding lunatic.
4) Never believe people when they say ‘it’s different this time’ and if they mention ‘a new paradigm’ of endless prosperity reach for you gun. Boom and bust cycles will keep happening provided people like my ex-missus covert new Jimmy Choos despite not being able to afford them without her (or my) plastic friend.
5) We’re all doomed. I’m gonna put my balls on the line here and publicly declare that they’ll be a stock market crash within 12 months. I predict troubled credit markets combined with oil at $80 a barrel will lead to a recession – probably triggered by something silly like the US invading Iran. And if you believe any of this tosh you clearly haven’t been paying attention.

If I had my way, I’d never make predictions, especially ones about the future. Unfortunately, my job and those of many of my peers in the City is to do exactly that. Since it appears that we can’t even work out why certain major events happened in the past what chance do we have of forecasting the future? This helps explain why 80% of US research analysts had positive recommendations in February 2000 – a month before a three year bear market that saw stocks halve in value. Quite simply, important price drivers such as the oil price, interest rates and currency fluctuations are so imponderable that most predictions are about as valid as my ex-girlfriend’s theory that a joint back account would somehow ‘spice up our love life’.

Still as long as the mug who runs your ISA or pension fund keeps thinking I’m worth talking to I’m happy to keep taking your money.

Thoughts ?

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