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Quote of the Day

“Many of us like to think of financial economics as a science, but complex events like the financial crisis suggest that this conceit may be more wishful thinking than reality.”

-Andrew Lo

January 28th – This Day in Stock Market History

January 28th, 1965 – The Dow Jones Industrial Average crosses 900 for the first time.

Chart from Macrotrends
Chart from Macrotrends

The stock market had a blistering rally that lasted more than 2 decades after the end of World War 2 – Sending the Dow Jones Industrial Average from 200 in the late 40s, to nearly 1,000 by 1965.

The later stages of this rally would also be responsible for causing Warren Buffett to close, and eventually liquidate, his partnership. By 1966 he would close his partnership to new investors, by 1967 he would tell his investors:

When the game is no longer being played your way, it is only human to say the new approach is all wrong, bound to lead to trouble, etc. I have been scornful of such behavior by others in the past. I have also seen the penalties incurred by those who evaluate conditions as they were – not as they are. Essentially I am out of step with present conditions.

By 1968 he would tell his investors that prospects for the partnership were “poorer than at any time in our history.”

And by 1969 he would announce that the partnership would be liquidated.

The next decade would be one of the worst (on an inflation-adjusted basis) in the entire history of the Dow!

Source: Buffett Partnership Letters, and The Market’s Measure: An Illustrated History of America Told Through the Dow Jones Industrial Average

January 28th, 1986 –  The space shuttle Challenger explodes upon takeoff.

New York Times Coverage of the Challenger explosion
New York Times Coverage of the Challenger explosion

The Challenger explosion represents one of the most amazing examples of just how efficient the stock market can be:

There were 4 main contractors for the U.S. space program in 1986; Lockheed, Martin Marietta, Morton Thiokol, and Rockwell International.

The shares in all 4 companies sold off about 6% by about 11:51 (12 minutes after the explosion). However, 3 of the companies would see their shares recover and close down 5% or less, while one company’s stock continued to fall. One company, Morton Thiokol, would see its stock continue to fall and close down about 12%, taking about $200 million off of its market cap.

It would take the Rogers Commission 5 months to determine the cause of the explosion, faulty O-rings in the booster rockets. A finding after a famous “experiment” by Richard Feynman:

Those O-Rings were manufactured by Morton Thiokol.

After the Rogers Commission’s decision Morton Thiokol was subjected to fines, settlements, and loss of future revenue – which would end up costing the company about $200 million.

What took the Rogers Commission 5 months to determine, and the legal system years to settle, the stock market figured out AND valued in just minutes.

Source: Adaptive Markets: Financial Evolution at the Speed of Thought

We have a blog post covering this event in much more detail:

Wisdom of Crowds – How The Stock Market Reacted to the Challenger Explosion

Best January 28th in Dow Jones Industrial Average History

1982 – Up 2.56%, 21.59 points.

 

Worst January 28th in Dow Jones Industrial Average History

2000 – Down 2.62%, 289.15 points.

Watch of the Day

Andrew Lo, the author of Adaptive Markets, is also an economics professor at MIT. His class is available for free on ITunesU as part of MIT’s Open Course Series. The class takes place during the worst of the 2008/2009 financial crisis, his commentary his incredibly valuable, not to mention the content of his lectures on the topics of economics. You can watch the class for free, here:

Finance Theory I – MIT

Andrew Lo also gave an amazing talk at Google about his book, available here:

Andrew Lo Talks@Google

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