8. Diversification

The old addage 'Do not place all of your eggs into one basket' is as true today as it was then. It is always wise to spread the risk and not invest too much capital into one particular stock.

CRA$HMAKER by Jim Puplava Remembering Black Monday Monday, October 19, 1987 was a day no one would forget. A storm appeared out of nowhere that would wreak havoc on the world’s financial markets. By the end of the day, it looked as if the financial system was headed for the abyss. In the words of one observer on the Street, "This one came out of the blue. I didn’t expect it to be so bad…we froze around 3p.m. and just started watching the screens. Even the phones stopped ringing. We were watching history in the making." That day became everyone’s nightmare. The Dow fell 508 points, a loss of 22.6 percent in a single session. Not since the 1929 stock market crash had the stock market fallen this fast and lost so much of investors' money. The stock market crash of 1929 had shattered public confidence. Over the years, $30 billion disappeared from the American economy. For the financial markets and stock investors, it would take nearly 25 years to recover. To many on Wall Street, the events of October 19, 1987 resembled similar events nearly 58 years before. Everything was down double-digits. With a 22.6 percent loss, the Dow was making the headlines. However, other markets suffered similar damage. The NYSE composite lost 19.2 percent, the S&P 500 dropped 20.5 percent, and the Wilshire and Value Line Index lost 17.9 and 15.1 percent respectively. The fury of selling was seen everywhere. No index had been spared that day. Even the Dow Utility Average dropped 15.3 percent. Market internals were just as horrific. For every stock that rose that day, 37 issues declined by comparison. There were 10 new highs on the New York Stock Exchange and 1,068 new lows. Advancing volume was only 1,129,000 shares. Declining volume totaled 602,781,000. Few shares rose that day and those that did were rare and confined mainly to the gold sector. Global Meltdown The crash on Wall Street was a worldwide phenomenon. Stocks were not only crashing in New York, but around the globe. The markets in Japan and Hong Kong crashed and some would remain closed for a week. Experts were attributing the panic selling to program trading, but the carnage was everywhere. Program trading became the scapegoat, but that blame could hardly explain the collapse of markets worldwide where program trading did not exist. Officials were perplexed as to the cause as very few had seen it coming. A Presidential commission was tasked with looking into the matter. While government officials looked for a simple answer for the crash, they looked more at symptoms rather than the cause. The 1987 crash was universal. No world market escaped unscathed. Many of the global markets faired much worse than the U.S. Those that had fallen far more than ours did not have index arbitrage. This failure left many unanswered questions. If other markets didn’t have program trading, then what, in fact, caused the crash? The answer to that question will be explored in a moment. We do find some clues in what few on Wall Street were willing to acknowledge. The U.S. dollar had been dropping sharply since 1985. Gold and commodity prices had taken off and in April 1987 the U.S. bond market crashed. By October of that year, interest rates had risen to the 10 percent level. The events leading to the crash could be seen in retrospect and it all led back to the dollar’s decline. It was a declining U.S. dollar that led to rising gold and commodity prices, which triggered the bond market collapse. In a nutshell, a collapsing dollar triggered a whole chain of financial events in other markets that led to the final crash in the stock market. 20th Century Graph This graph depicts the "seasons" of last century's stock market.