In a special series, leading City figures give us their recollections of Black Monday, 30 years on from the great crash of 1987. It turned out to be a great opportunity for Paul Mumford, manager of Cavendish Opportunites, who could pick up great stocks on the cheap.
What job were you doing at the time of 1987 crash?
I was working as a stock broker with R Nivison & Co but it so happened that I had recently made the decision to switch to fund management. I was planning to leave at the end of October to set up a fund which I still run today, the Cavendish Opportunities fund.
In this respect the timing was a fantastic stroke of luck. The panic sell-off meant that by the time my new fund launched in February '88 there was the opportunity to pick up a large number of great stocks - where fundamentals had not altered - on the cheap.
What do you remember from the day?
One of the main reasons why the crash was so memorable was the weather. On the Thursday the UK experienced the great storm which battered the country with hurricane winds of up to 110 miles per hour.
It was all very dramatic and will forever stick in my mind. I was driving home from London at 3 am and remember trees strewn everywhere with emergency services using chainsaws to clear a passage. My normal Reigate turnoff from the M25 was blocked by trees and the police directed me on a long detour to my home which had lost a chimney pot and a couple of trees.
The following morning I was ready to return to work but the roads were completely inaccessible and, due to similar problems elsewhere they ended up closing the stock exchange.
Perhaps the crash might have been less severe had the stock market been open on the Friday but when the market opened on Black Monday there were a lot of pent up selling orders awaiting execution.
In the US the problem was more acute due to the emergence of the computer, which allowed for sophisticated dealing systems in the futures market giving a greater pressure on share prices. The UK was behind the curve in this respect but investors were dabbling in traded options. With the market moving so rapidly that morning, several underwriters were obligated to buy shares that they did not want or could not afford to hold. Forced selling from this quarter exaggerated the normal trading activity and contributed to the crash. One of my institutional clients racked up huge losses for its clients this way and was forced to take the hit itself. Fortunately it was not an area that I had become involved with.
Despite market hiatus, I felt at ease having lived through the '73/'74 crash, which was far more severe - people then were talking seriously about stockpiling tins of baked beans under their floorboards! That experience had taught me just how unjustifiably cheap stocks can get in a panic situation and how markets can recover much more quickly than people expect.
By '87 I had learned not to fear these sorts of market movements - in a strange way I almost welcomed it, as there was a once in a lifetime opportunity to pick up incredibly cheap stocks.
Once again my instinct turned out to be correct. While we had falling markets for the rest of month, things steadied in November, and after that things turned around much more quickly than many expected. It was then too late for the panic sellers to buy back their shares at a profit.
Looking back, the crash was partly an artefact of its time. With modern electronic trading there is no need to physically be in an office or stock exchange for markets to function. As such, the storm would not have affected trading. However the role played by computer trading in the US is reminiscent of modern concerns over highly automated derivatives trading, exemplified by flash crashes.
What impact if any did the 1987 crash have on your career?
The fact that the crash came just ahead of me moving into fund management was a stroke of luck. It meant that by the time I launched Cavendish Opportunities in February '88 the market was awash with undervalued stocks, ensuring my decision was a good one.
It also confirmed to me the importance of taking a bold counter-cyclical approach to investment - to treat crashes like '73 and '87 primarily as opportunities. The principle is simple: making money from equities involves buying low and selling high, and having the temerity to do so when everyone else, due to either panic or exuberance, is doing the opposite. This strategy has remained at the core of my approach for nearly three decades and is one of the key factors behind the success of my funds.