Four Simple Rules for Cleaning Up in a Market Crash

Here in my office at Money Map Press is a collection of important “stuff” – and by “stuff,” I’m talking about the photos, letters, documents, stock certificates, postcards, et al., that I employ in an effort to make my Private Briefing missives stand out from all the other newsletter offerings out there.

And tucked into my files is a special issue of Time magazine. The cover – in bold, black, capital letters – fairly screams, “THE CRASH.”

The issue was dated Nov. 2, 1987. And a hefty slice of it was focused on “the crash of ’87.”

That was the Oct. 19, 1987, sell-off that saw the Dow Jones Industrial Average drop 508 points – at the time a heart-stopping plunge of 22.61%.

I pulled that magazine out of my files after the market closed on Oct. 24. That’s the day the Dow plunged 606 points – prompting talk of a “new market reality”… perhaps even a bear market.

I remember the same kind of talk following the “Black Monday” plunge of 1987.

Indeed, the Time magazine cover alliteratively warns readers that, following a wild week on Wall Street, “the world is different.”

As it turned out, that prognostication was incorrect.

The crash of ’87 had little lasting impact. So folks who overreacted hurt themselves.

There’s no way to tell if the latest sell-off is the start of something worse – or just another “non-event.”

The reality is that it doesn’t matter.

Let me tell you why…

Black Monday: the Day I “Discovered” the Stock Market

The crash of ’87 had little real impact on the U.S. economy, or on long-term stock prices.

But it did have a big personal impact: It got me interested in stocks – and so became a kind of life-changing event.

I guess I viewed “the crash” as an “intellectual exercise” – an event that fascinated me so much that I wanted to learn all I could about what happened and why.

For most folks, the crash turned them against stocks – some folks forever. That goes against the “conventional wisdom,” since the plunge ultimately turned out to be a “non-event.”

And yet a Washington, D.C., meeting of 33 prominent economists in December of 1987 ended with the collective prediction that “the next few years could be the most troubled since the 1930s.”

Instead, the U.S. economy didn’t miss a beat. Growth surged that year and the next.

And the Dow?

Well, after dropping all the way down to 1,738.74, it rebounded, regaining its pre-crash closing high of 2,722 by early 1989.

Still, lots of “regular” folks I knew swore off stocks – many for a long time.

For me, it was just the opposite.

I was drawn to the stock market.

Market Lows Proved to Be a Personal Springboard

I tracked down a broker and opened my first trading account. And I bought my first stock – an out-of-favor utility, Southern Co. (NYSE: SO).

I still own some of the shares, bought that November for a split- and dividend-adjusted price of about $1.30 a share. It now trades at roughly $45.

That first purchase did more than turn me into a real investor – it also shaped the philosophy I’ve carried with me ever since.

I flat-out feel more comfortable finding stocks that are out of favor – either beaten down to bargain levels, or ones whose huge upside just hasn’t been recognized yet.

Buying stocks after the biggest single-day crash in history made me into a contrarian – especially since the broker I ended up with was a “deep-value” Legg Mason man named James C. Liddle.

Being forged as a contrarian opened other doors for me, as well.

It led to my first book, co-authored with Rochester, N.Y., money manager Anthony Gallea. The book, “How to Buy and Sell When Others Won’t and Make Money Doing It,” was published by the prestigious Prentice Hall.

Even better: Because of my true contrarian bent, when I cold-called the legendary Jim Rogers and asked if he’d contribute a foreword, he could tell I was “authentic” and seemed to take a liking to me. So he did something unusual (for him) and said yes.

Partly because of Jim’s name – and some very nice reviews – the book sold well. I got royalties for about six years. And the fact that I was a published author opened a lot of professional doors.

The investment strategies I’d learned and embraced enabled my wife Robin and I to save and buy a nice house (even though I was still working on a newspaper reporter’s salary).

And my love of stocks and stock stories – combined with my writing and editing skills – landed me this job at Money Map Press, where I work with the best gurus, the best editors, the best colleagues, and the best publisher, Mike Ward, in the newsletter business.

All of this reminded me of what I guess is a personal credo that’s guided me ever since. And I wanted to share it with you.

My “Crash Credos” for Cleaning Up in the Long Run

Crash Credo No. 1: While others lose their heads, keep yours. When I saw folks freaking out over last week’s drop, I knew a little perspective was needed. The ’87 crash was a 508-point plunge, or 22.61%, that dropped the Dow all the way down to 1,738.74. Last week’s 606-point fall was a 2.4% decline – which dropped the blue-chip index down to 24,583.42. A 2.4% decline isn’t tiny, but it isn’t worth losing your head over. Indeed, if you have a good plan, even a big drop shouldn’t get you off your game.

Crash Credo No. 2: Over the long haul, stocks rebound. A lot of folks abandoned stocks forever after the ’87 crash, and just look at what they missed: part or all of the run that took stocks from 1,740 to nearly 25,000.

Crash Credo No. 3: Reverse your thinking. So many investors look at a sell-off as a reason to sell. Wrong – it’s an opportunity to buy. That’s why we tell folks to maintain a “shopping list” of stocks they’d like to own for the long haul. And it’s why I’m an advocate of the “accumulate” strategy. If you like a stock as share prices are advancing, why should you like it less when stocks, across the board, are falling because of investor emotion? Just look at my example of Southern Co.: The stock I bought then at $1.30 is now trading at $45 – and it’s been as high as $53.51. That’s a 41-fold return on a utility – one of the most conservative types of stocks. Returns on other “bargains” can be even bigger.

Crash Credo No. 4: It’s better to plan than to react. Get your plan together in advance of a sell-off – so you know what you’re going to do when it happens.

If there’s one overarching lesson here, it’s this: Follow your own counsel – and if you have a game plan and strategy that you like and are comfortable with, stick with it.

That historic crash three decades ago was an “inflection point” in my life. It brought good things to me. And it now allows me to “pay it forward” – to find ways to help you.

Which I’ll keep doing. And that’s a promise.

— William Patalon III

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Source: Money Morning