and a little luck, let Kellogg investors weather the 1987
as "Black Monday," a dark day indeed for investors.
Oct. 19, 1987, the Dow Jones plunged 508 points, losing 22.6
percent of its value. In one day, $500 billion disappeared
from investors' portfolios. Markets around the world tumbled.
were pretty shell-shocked that day," remembers Robert
Korajczyk, the Harry G. Guthmann Distinguished Professor
of Finance. "Many faculty members were wondering if we
were entering into the equivalent of the Great Depression."
still cannot settle on one main cause for the crash. Program
trading took much of the blame, while others pointed to panic
selling, overvaluation and illiquidity.
can come up with lots of explanations ex post facto, but it's
not always clear why something like this happens," Korajczyk
hindsight, he adds, the market overreacted. But while most
portfolios took a big hit, all was not so bleak for a few
investors. In fact, within weeks, members of the Kellogg School's
student-run Portfolio Management Club had reason to feel downright
club began in 1987 with a stock portfolio valued at $33,000.
By the end of November, the portfolio was worth about $40,000
— a gain of about 18 percent.
members credited the results to "a combination of dumb
luck and conservatism," as chairwoman Anne Wieboldt
'89 noted at the time. But their modesty couldn't obscure
the fact that the group had made some smart defensive moves.
Thanks in part to their prudence, the fund was positioned
for healthy gains in subsequent years. As of Oct. 8, 2007,
its value stood at $353,643.
month before the 1987 crash, the club had sold a portion of
its stock — a typical move each September that provided
new members with fresh capital for new investments.
the market's pre-crash volatility had led the club to reallocate
its portfolio to 60 percent cash, instead of its usual summer
position of 75 percent stocks and 25 percent cash. The market
had peaked in August and equities were valued at historical
highs relative to fixed-income investments and earnings forecasts.
Together, those elements justified a conservative stance,
remembers David M. Garrity '88, a club officer.
a result, the value of the club's portfolio fell "just"
$5,000 on Black Monday, a cause for pause, to be sure. But
by the end of that November the fund had recovered that amount
and more. Few other fund managers could say the same.
Garrity, it was a stark but simple lesson. "What did
I learn from Black Monday? Two words: risk management,"
says Garrity, a chartered financial analyst and director of
research at Dinosaur Securities LLC in New York and a frequent
commentator on portfolio strategies for CNBC and other news
firmly believe that it was risk management and asset allocation
that enabled us to preserve the fund's principal value and
to allow the appreciation it enjoyed that year."
strategy was not one Korajczyk, then the club's adviser, would
have chosen, though he allowed the students to follow their
own path. "If you're an equities manager, your mandate
is to manage equities and be fully invested," he says.
"I probably would not have recommended their strategy
— and I would have been wrong, ex post."
Garrity watched his classmates' reactions to the crash. "As
the day went on, people were walking out in the middle of
class, rushing back to the dorm to check the financial news,"
he recalls. "People started to give serious consideration
to changing their career plans, saying 'If this is a taste
of what life is going to be like on Wall Street, I don't think
I like the heat!'"
fact, just 9 percent of the Class of 1988 obtained jobs in
investment banking, compared to 17 percent of the previous
year's graduates, according to Career Management Center records.
Not that there were many Wall Street jobs to choose from —
many firms had responded to the crash by slashing payrolls
and new positions.
was very interesting to see how people's risk aversion became
greater in the weeks after the crash," Garrity says.
"If nothing else, it reminded us of the importance of
simple practices, like diversification and putting money aside
for a rainy day."
Kellogg investment club's fund was created in the mid 1960s
with $4,000 from the late industrialist Henry Crown and bolstered
in the 1970s with a similar amount from the Crown Foundation.
It was conceived as a way for students to gain real portfolio
management experience with real dollars.
the fund is still student managed, but through a Kellogg course
called the Asset Management Practicum. The four-quarter,
full-credit class allows students to manage about $2.7 million
of the school's endowment portfolio.
equity portion of the fund follows a value investing strategy
that is based on the students' fundamental security analyses.
The fund allows short and long positions and the use quantitative
and derivative strategies with respect to the fundamental
have investment guidelines, but students are allowed some
latitude in the exposures they choose to take on," says
Korajczyk, who teaches the class.
is among many Kellogg alums who have used this experience
to build a thriving financial-services career. He now manages
a fund at Dinosaur that, as of Sept. 30, has enjoyed a 34.2
percent annualized total return against the S&P 500's
comparable 17.6 percent return since its inception in March
endowment fund that he has managed since September 2004 also
boasts strong returns: 19.2 percent total return to the S&P
500's comparable 13.2 percent over the same period.
management and asset allocation continue to occupy Garrity's
mind: "When the market is down, we're typically down
49 percent of the market decline, and that's without the use
of any options," he says. "It's strictly securities
years after the crash, Garrity views today's up-and-down market
with equanimity. Yes, the current year has been volatile,
but Garrity calls for some perspective. He notes that 1998,
for example, with its recession in Asia, the sovereign debt
default by Russia and the collapse and rescue of the Long-Term
Capital Management hedge fund, saw twice the volatility of
this year. And even that was a far cry from 1987, he says.
don't want to diminish the human aspects of the [current]
subprime mortgage crisis," he adds. "But just looking
at it from a volatility standpoint, it's not anywhere as extreme."
notes that central bankers worldwide "acquitted themselves
quite well" earlier this year when they injected billions
of dollars into the global banking system in response to panic
selling prompted by the crisis. The move helped calm a jittery
market and quell fears of a broader economic meltdown.
dollar's weakness remains a concern, however, and Garrity's
advice for investors is rooted in the lessons he learned as
at Kellogg. "If you want to be diversified, be diversified
on a global level," he says. "Don't be dollar dependent.
It's all about risk management."
it always was.