What did Black Monday teach us?

Stock market investor Stanley Goldstein clearly remembers the crisis of Oct. 19, 1987.

"I was in business at the time," Goldstein said. "Our stock plummeted and stayed down to the point where my company no longer existed. My IRA and 401(k) was tied up in the stock and I was not happy, to say the least."

Investors and business owners like Goldstein recall both good and bad times in the 1980s,

"I think of '85, '86 and '87 as business was great. It was a boom time," he said. "We didn't expect the crash."

The stock market crash affected investors worldwide, but it also contributed toward changing the way stocks are handled 20 years later.

The 1987 crash, known as Black Monday, was the second largest percentage decline over the span of one day in stock market history. The Dow Jones Industrial Average dropped 22.68 percent in the U.S.

Markets around the world felt the effects of the crash.

To this day, however, no one really knows exactly why the crash happened, but there are speculations across the board.

Michael T. Hofmann, financial adviser with Hofmann and Hofmann in Florence, said no one will ever be able to say that one particular thing caused the 1987 crash.

"Program trading, through computer-generated transactions, was certainly responsible to some extent," Hofmann said.

Program trading strategies were blamed because stocks were continuing to be sold as the markets fell, worsening the decline, he said.

"One of the other contributing factors of the decline in '87 was the psychology of the investors," Hofmann said. "They didn't want to see their portfolio decline. Individuals began to sell, just to ease the pain of what was happening."

Investors who pulled out one by one further contributed to the crash, he said.

Still, there are other theories for why the crash occurred.

"In October 1987, some people view that some very large selling at the open on that Monday sparked a spiral of events that sent the market way down," said Robert Brooks, who holds the Wallace D. Malone Jr. Endowed Chair of Financial Management at the University of Alabama.

"I think it was caused by a severe imbalance of sell orders at the New York Stock Exchange and other stock exchanges," he said.

Having a stock market crash today, like the one in 1987, could happen, Hofmann said, but it's not likely that it would be as significant of a percentage drop.

Hoffmann said contributing factors to a crash in today's market could be anything from a significant change in interest rates, a change in the direction in the economy, or other disappointing world news or a major catastrophe.

"There are things lurking around out there that could really impair the market," Brooks said.

In some ways, however, crashes are healthy, he said.

"Crashes tend to take leverage out of the marketplace and good times tend to put leverage back in," Brooks said. "You might be tempted to take out a huge mortgage when times are good, but people are more conservative in the risks they take after a crash."

Hofmann said that after the crash of 1987, investors and financial advisers learned to diversify their portfolios. Also, they were beginning to consider the market on a global scale, he said.

"We have better communication and coordination between the international markets now," Hofmann said.

Jim Couch, a professor in the Department of Economics and Finance at the University of North Alabama, said that as a result of the crash 20 years ago, so-called circuit breakers have been built into the market.

"These bring trading to a halt when losses reach a certain level. The idea is to stop panic selling and to give traders an opportunity to settle down," he said.

Hofmann said computers also have made a huge difference.

"We get information much quicker now than we did then," he said.

Brooks said that as long as the stock markets have human involvement, however, there will be times of uncertainty.

"It's the same human beings that run financial markets today as in 1987," he said. "I'm not entirely convinced that any technological advances will change fundamental human nature. We tend to panic in mass. I'm not sure that will ever change."

The potential for a crash-like experience always exists in equity markets, Brooks said, and being prepared for the worse and expecting the best often lingers in the minds of investors.

Couch said all investors should be aware of the risks involved in investing. He advises a long-term approach.

"The market has generated returns in the neighborhood of 12 percent over the past few decades," Couch said. "While the market can be like a roller-coaster in the short-run, a long-term approach is an excellent mechanism to build wealth."

With more people investing in stocks and becoming better acquainted with the market, there is a wealth of individual knowledge today that didn't exist in 1987.

"Most people can tell you what the markets have been doing recently and what the interest rates are. Most people that are working have exposure to the markets," Hofmann said. "We've become better educated as investors and understand what things have an impact on the market."

No matter how prepared individuals or businesses are, though, the future is something that's never going to be certain, Brooks said."On any given day, there are things that could really hurt the market," he said.

"Markets are going to change, but over the long run, stocks will be better as bonds as long as we exist as a free economy."

Kenda Williams can be reached at 740-5720 or kenda.williams@timesdaily.com.