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Friday, 18 November 2011

Stock Market Crash


A rapid and often unanticipated drop in stock prices, resulting in a significant loss of paper wealth. Crashes are often occur under the following conditions
1. A prolonged period of rising stock prices.
2. Excessive economic optimism
3.A market where P/E ratio exceed long term averages.
4. Extensive use of margin debt
5. Leverage by market participants

Historical Crashes:

Wall Street Crash of 1929:


The lead up to October 1929 saw equity prices rise to all time high multiples of more than 30 times earnings. It was a technological golden age as innovations such as radio,Auto mobile aviation, telephone and power grid were deployed and adopted.
on august 24 1921 the Dow Jones Industrial average stood at a value of 63.9. By September 3, 1929 it had risen to 381.2. By the summer of 1929 the economy was shrinking and the stock market went through a series of unsettling price declines.On October 28 an 29 the Industrial Average fell 38 points to 260, The Dow Jones Industrial Average would lose 89% of its value before finally bottoming out in July 1932.

The crash of 1987:

The crash of 1987 did not lead to a bear market. The rapid and severe down turn in stock prices that occurred in late October of 1987. After 5 days of intensifying stock market declines selling pressure hit a peak on October 19 known as Black Monday. The Dow Jones Industrial Average fell a record 22% on that day alone, with many stocks halted during the day as order imbalances prevented true price. Investors and regulators learned a lot from the 1987 crash.,specifically with regards to the dangers of Automatic or program trading. Humans are needed more than ever to assess the situation and possible over ride imprudent market thresholds.

The crash of 2008-2009: 

On the September 16,2008 failures of massive financial institutions and US banks, most notably the Lehman Brothers Bank resulted in a Global Financial Crisis. This affected banks throughout Europe. Iceland was worse hit and the value of its Krona reduced rapidly threatening to send the whole country into bankruptcy.Iceland was able to secure an emergency loan from the International Monetary Fund in November. In United States , 15 banks failed in 2008.On October 24 many of the world's stock exchanges experienced the worst declines in their history with drops of around 10% .By march 6th 2009 the Dow Jones Industrial Average dropped 54% from 14164 to 6469.
every body was looking to get as far away as they would from stocks but one person was busy putting all his money into stacks. And this person was none other than the legendary investor Warren Buffett.
Buffett believed that when the entire world sees things with short term view , even good , fundamentally strong companies witness a drop in price along with all the other stocks. He believed that such companies would set new earnings records 5,10 and 20 year down the line and hence you are getting an opportunity to grab them for cheap now.

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