Some of you experienced the bursting of the dot.com bubble and some may have experienced déjà vu when the Financial Crisis hit.

How many of you, however, remember being an equity investor on Black Monday (October 19th, 1987)? The headlines from Black Monday would rattle even the most confident investor:

‘Stocks Plunge 508 Amid Panicky Selling’
– Wall Street Journal

‘Stocks Plunge 508 Points, A Drop of 22.6%; 604 Million Volume Nearly Doubles Record’
– The New York Times

‘Stock Market Suffers Largest Loss in History As Dow Industrial Average Drops 508 Points’
– The Washington Post

For those of you unfamiliar with Black Monday, this is when the Dow Jones Industrial Average caught everyone by surprise and plunged 22.6% in one day! While the plunge now appears as a mere blip on a long-term chart I encourage you to narrow the time frame of this chart.

If you were fully invested at the time, I can assure you it was not a blip…Especially if you had been employing the use of leverage in an effort to juice your investment returns.

I have purposely decided to focus this article on the lessons I learned from Black Monday as opposed to the ‘dot.com Bubble’ and the ‘Financial Crisis’. My rationale for doing so is that there were multiple warning signs of an impending market implosion before the ‘dot.com Bubble’ and the ‘Financial Crisis’. While there were some warning signs prior to Black Monday, they were not as readily apparent.

Before we delve into what triggered Black Monday, let me highlight what I feel were some of the most basic warning signs any prudent investor should have seen regarding the ‘dot.com bubble’ and the ‘Financial Crisis’.

Dot.com Bubble

It was not uncommon to read about a company with minimal, or no, revenue that was trading at nosebleed levels and whose stock price was increasing at alarming rates over very short periods of time. In many cases, price-to-earnings ratios couldn’t even be calculated because the earnings component of the ratio was non-existent.

In other instances you had profitable companies with viable business models which also burned investors because investors tossed caution to the wind. Online trading platforms were becoming increasingly popular and many individual investors decided to enter the equities market; some people quit their full-time jobs to take up day trading.

In addition to not having a clue how to evaluate a company, a large percentage of retail investors entered the market well after the start of the dot.com bubble. While many investors may have invested in companies with real products, a viable business model, and strong financials, the mistake they made was to invest in companies trading at stratospheric price-to-earnings multiples (eg. Microsoft (MSFT), Intel (INTC) and Cisco (CSCO). If you pull up a stock chart for Intel and Cisco you will see that an investor who invested in these two companies at the height of the dot.com bubble has not fared too well. If you look at the stock chart for Microsoft, you will see investors had to be extremely patient before they recouped their investment.