Financial, Investing

What I Did To (WID2)… Learn to Invest — More Family Knowledge

On September 6, 2007, there was a drop in the stock market.  (It was also my moms’ birthday.)  Someone on The Motley Fool posted and was concerned about it.  I hadn’t even noticed that it was a down day.

But it reminded me of what is now known as Black Monday back in 1987 (ye gods, ancient history now), when the Dow dropped 500+ points in a single day and the stock exchanges stopped trading to end the plummet.  Back then, the Dow was far lower — 500 points was a 23% drop — and it happened all over the world. (By the way, here’s an interesting article about the crash and why it happened:

Do you remember that day?  Lots of people probably don’t anymore.  I was a sophomore in college.  I joined my next-door neighbors (including the now-well-known journalist Jonathan Capehart, who back then was just the guy who spent all his time working on The Carletonian) to watch the news.  The newscasters were predicting, more or less, the end of the world.  There was all kinds of worry (I realize now that it was likely manufactured for ratings) about what would happen when the markets opened the next day.   That day, the concern was what would happen when the new-at-the-time computerized buy/sell models got their hands on the market again.  (As yet, the robots have not taken over the world.)

We watched for about an hour, and my concern grew dramatically as we watched.  (I was less inured to newscaster ranting then.  Then again, it also happened infrequently in those days.)  Unlike everyone else there at the time, I actually owned stock that my parents managed for me.  I wondered whether I was watching the bankruptcy of my family and the beginning of another Great Depression.

Later that evening, I called my parents and asked what we were going to do.  My mom and dad were about to turn 50 back then (younger, yes, than I am today).  My youngest brother had just started kindergarten, Dad had been president of his little bank for three or four years.  Though they were not as wise as they are now, they had 30 more years of experience more than me.

I suspect my voice was a little shaky when I asked what was going to happen to us. My mom laughed. She laughed! Here I was in a panic and she was chuckling.  It’s amazing how a calm mom can calm down even a 19-year-old daughter with a chuckle.

She said, “We’re not going to do a thing. The market goes up and down all the time and so do our stocks.  And [the stock we owned the most of] isn’t affected by this kind of thing.  The companies we own are stable, solid ones that people will still need even if there is a downturn in the economy.”

I was astonished.  Here they were saying on the news that it was the beginning of a Depression, and mom said no, everything would be okay? I learned a lot that day.   What they say on the news isn’t always right?!?  Who knew? And I learned that my mom and dad were more likely to be right than the evening news.  And I learned not to panic when something dramatic happens in the financial markets.

So all of that informed my thoughts about September 6, 2006.  To me, the decline looked like no more than the usual variability.  And hey, that was something that could be checked.  So I downloaded an Excel spreadsheet of Dow closing prices from Yahoo Finance.  I found the change in price each day — subtracted the closing price from the closing price of the day before.  Then I did some calculations. Here’s what I found:

First Day of Preschool, August 25, 2007

The average daily change in the Dow in the previous year was 55 points.  The average change upward (ignoring all the down days) was almost 57 points. The average change downward (ignoring all the up days) was about 53 points.  There were 129 up days and 122 down days.  And 32 of those down days were larger drops than than September 6.

My assessment of variability appeared to be correct.  Which made me think about larger perspectives and to remember what Peter Lynch said:  Either the sky is falling and we’ll all be using the survival gear we have stored in the basement… or it’s not.  If the sky is not falling, then how will we proceed?  Because once the sky does fall, we won’t be worrying about our investments at all.  So if we’re going to worry about our investments, we’d better worry from the perspective that there will still be stocks — and companies — and a functioning economy.  Assuming that, then how best do we proceed?  Selling on a down day isn’t a good approach, I don’t think.  When do you sell?  When a company no longer justifies its price, whether that price is high or low.

All of this was written, of course, two years before the crash of the housing market.  That was a whole other level of scary.  I eventually capitulated, kind of.  And I actually got some survival gear to carry in the car.  But that story will come later, and the lesson of this story still applies.  The housing market crash was a really bad year that led to a bad decade that we’re still recovering from.  But there are still stocks, still companies, still people who do business with one another.  The remarkable level of innovation that was happening before that has continued.

Showing off the backpack on the first day, and the fancy hairdo, August 25, 2007

We continue to be in a world that is changing incredibly quickly, both in terms of technology and in terms of our cultural expectations.  Almost all of the changes I see are good — the world is a better place than it was in 2006.  And definitely better than in 1987.  The thing I worry about is how small errors tend to blow up in our faces 30 or 50 or 100 years later.  I can’t see what they are, but I am sure that they’re there.

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