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Quote of the Day

“Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market.”

-Warren Buffett

A fitting reminder on a day that marks the anniversary of 3 major panics in stock market history (see below).

August 24th – This Day in Stock Market History

August 24th, 1857 – The panic known as the “Western Blizzard” causes the stock market to collapse. At the time this would be the worst financial crisis America has seen.

1857_panic

Stock reached their highs in early August 1857, but on August 24th, 1857 it was announced that a cashier at Ohio Life Insurance and Trust Co. had embezzled nearly all of the company’s assets and that the company has failed with $7 million in liabilities.

Trading volume hits a record of 70,000 shares traded (compared to a normal of 8,000-9,0000 for the period). Banks restricted withdrawals for 59 days. Jay Cooke makes his famous quote: “Money is not tight, it is not to be had at all.”

Source:  Wall Street and the Stock Markets: A Chronology

This Panic of 1857 would have a profound impact on the future of America and specifically the American financial system. A rift between the North and the South begins to develop as the North remains in a depression for several years, but the South’s economy is strong thanks to the export of cotton (and slavery which made the export of that cotton extra profitable). The magnitude of the rift is evidenced by an Op-Ed in the Charleston Mercury which asks: “Why does the south allow itself to be tattered and torn by the dissensions and death struggles of New York money changers?” Talks of secession would be quieted temporarily through the late 1850s, but by 1861 the country would be engulfed in civil war.

Stock prices would fall nearly 40% from early 1857 to the June 1859 lows. It would take more than 4 years for the market to recover.

Source: Panic on Wall Street

The panic also eventually leads to the creation of the Federal Reserve System after it becomes apparent that the numerous banks issuing their own currency is to blame for the economic boom and busts.

August 24th, 1921 -The Dow Jones Industrial Average reaches its post-World War 1 low with a close of 63.90, finishing off a 46.6% decline over the last 21 months.

Dow Jones Industiral Average from 1918 - 1930. Chart courtesy of MacroTrends.net
Dow Jones Industrial Average from 1918 – 1930. Chart courtesy of MacroTrends

August 24th, 1967 – A group of a dozen men and women, led by James Fourrat and Abbie Hoffman throw money in the form of $1 bills onto the trading floor as a protest of American capitalism and greed. 2 weeks later, the visitors’ gallery was encased in bulletproof glass.

Source: Eyewitness to Wall Street

August 24, 1967 New York Times story on "Hippies" throwing money on the NYSE floor
August 25, 1967 New York Times story on “Hippies” throwing money on the NYSE floor

August 24th, 1989 – The Dow Jones Industrial Average closes at 2,734.64, its first new all time high since “Black Monday”, the October 19th, 1987 crash.

Chart from macrotrends
Chart from macrotrends

It only took the stock market 2 years to fully recover from the worst day in stock market history.

August 24th, 2011 – Steve Jobs steps down as Apple CEO.

The original press release from Apple:

steve_jobs_resigns

Jobs’ second run as Apple’s CEO began January 6th, 2000. Between January 6th, 2000 and this day in 2011, Apple’s stock would rise 1,407%:

apple_stock_chart_under_jobs

August 24th, 2015 – The Dow Jones Industrial Average suffers a flash crash and its first 1,000 point decline.

After panic from Chinese markets spreads around the globe, the Dow Jones Industrial Average falls 1,089 points just minutes after the opening bell. At one point shares in market heavyweights General Electric and Pepsi were down more than 20%.

The market would stage a near 1,000 point intra-day rally by lunch, then fall and close the day down “just” 588 points. One of the wildest days in Wall Street history!

Watch clips of the coverage of the day below:

Below, A recording of the first few minutes of the day from CNBC:


Other notables moves on this day:

Celgene would fall 21%

General Electric would fall 21%

Netflix would fall 17%

Verizon would fall 17%

Facebook would fall 16%

Apple would fall 13%

Amazon would fall 8.7%

Google would fall 7.7%


Best August 24th in Dow Jones Industrial Average History

1915 – Up 2.85%, 2.19 points.

Worst August 24th in Dow Jones Industrial Average History

2015 – Down 3.57%, 588.40 points.

Read of the Day

What causes normally rational people to react in such panic to news like we saw in the clips above? Despite “rational” thinking of earnings and fundamentals, investors sold shares first and asked questions later on the morning of August 24th 2015. The most famous book on the topic is Daniel Kahneman’s Thinking Fast and Slow, but there is another I like better:

I think one of the best explanations of the ways our brain works in such situations is in Jason Zweig’s classic book “Your Money and Your Brain“. Here is just one short quote and example:

“Know when reflex will rule. It’s no surprise that mutual fund investors tend to lose their shirts whenever they buy and sell industry-specific “sector funds”. Analyzing an entire industry requires a great deal of reflective study; with dozens of companies offering hundreds of competing products and services, it’s hard to put together an objective picture of how profitable the entire sector will be in the future. But you reflective system will pick up much simpler messages – “oil prices are booming!” or “the Internet is changing the world!” – That can easily distract you from a more detailed analysis whenever this kind of excitement is in the air, warns psychologist Paul Slovic, “it’s hard to engage the analytical system. It’s much easier to go with your feelings about what’s hot and whatever generates the most vivid images – like buying nano tech stocks because someone says, “you know, those tiny machines can turn out giant profits.” Instead of giant profits, however, most people end up with big losses when they rely on this kind of reflexive thinking. In 1999 and 2000, investors lost at least 30 billion by piling into technology sector mutual funds just before the hot returns of the tech industry turned cold as ashes.”

The book is truly an unappreciated masterpiece. Best of all, used copies are usually under a dollar on Amazon!

<– Go To Previous Day: August 23rd, 1976: Vanguard announces first index fund for retail investors.

Go To Next Day: August 25th, 1995: Berkshire Hathaway announces purchase of GEICO –>