Mutual fund managers who lived through the stock market crash of Oct. 19, 1987, when the market plunged 22.6%, remembered the lessons learned, including the importance of seeking an outside point of view—particularly when the market is soaring, having a contingency plan and educating investors, The Wall Street Journal reports.
Brian Posner, now chief executive officer and co-CIO at ClearBridge Advisors, was a financial services analyst with Fidelity at the time. Portfolio managers and analysts just stared at their Quotron market data screens.
“One of the lessons at the time, and it’s questionable whether or not it’s been learned, is that there’s no free lunch,” Posner said.
Although some institutional investors thought that they were protected through portfolio insurance, it didn’t work, Posner said. “Like with most silver bullets, there were some fatal flaws,” he said.
Now that so many funds and investors have been affected by the subprime loan crisis, Posner believes that exotic forms of collateralized debt obligations might disappear.
Kent Simons, a consultant to Neuberger Berman, was a portfolio manager at the firm at that time. He recalls that bond yields were in the double digits and price/earnings ratios, which typically are in the tends, were in the 30s. The firm’s founder, Roy Neuberger, had impressed on Simons that if the market appears to be too good to be true, it probably is.