26 Years Later: The Lesson is Even Greater

A great example of everything we’ve talked about this month took place 26 years ago on October 19, 1987.

Do you remember what it was?

It was Black Monday: The value of the 500 companies that make up the S&P 500 Index dropped 25%.

Yes, you read that correctly:  25% in one day!

Not a very fun day!

Imagine if that took place today where minute by minute reporting takes place on cable channels and the internet.

To illustrate how much times have changed, Alan Greenspan, who was the chairman of the Fed at the time, was on a flight that day and didn’t learn of the “crash” until after he landed late in the afternoon.  And, he was the most important financial person in the world!

As is always the case with financial reporting, it seemed to most that it was the end of the world…or, at least the end of our financial system as we knew it.  Who could possibly withstand a 25% drop in one day?

However, something has taken place which was completely impossible to imagine back in 1987.

The 500 companies in the S&P Index did whatever was necessary and continued doing business the best way they knew how.

And, 26 years later, look what happened…

  • On that dreaded day back in 1987, the price of the S&P 500 Index closed just under 225.
  • On the 25th anniversary last year (2012), it was 1,433.
  • As I write this today right before the 26th anniversary, it’s 1,682!

Let’s attach dollars to that for a moment to put everything in proper perspective:

  • On October 19, 1987, the value of your holdings dropped to $225,000.
  • On October 19, 2012, the value of your holdings, not including all the dividends you received over the last twenty five years, became $1,433,000.
  • Today, just shy of 26 years later, they worth $1,682,000.

Do the math for a minute and you’ll discover that the value of the 500 companies increased seven and a half times since that day in 1987.  And, this does not include dividends paid each year which averaged over 2% per year.

Now, that is remarkable.

Yes, the events that took place on October 19, 1987 weren’t fun for any of us.  Viewed through one lens, they were gut wrenching and scary.

However, from the viewpoint of a lifelong “owner” of companies with long term perspective, it turned out to be just another day.

And, therein lies the BIG lesson for all of us.  Days, weeks, and months like October, 1987 are all part of the experience of being an owner/investor in search of continuous lifestyle sustaining income.

It’s painful, but it’s part of the experience.