Recent Stock Market Crashes

Firstly I am not INSINUATING anything.

So do not ass-u-me anything for it will make an ass out of you an me. This posting merely looks at past stock market crashes and it does not attempt to say when and where the stock market crash will happen.

However, if you reckon that such a posting is taboo and it will be a jinx to your investments then do please not read. Ok?

There's this old little book by Neoh Soon Kean called Stock Market Investment in Malaysia and Singapore. It's published under Berita Publishing Sdn Bhd.

Here are some collection of comments from the book which I find to be very interesting.

from pg 14...

It is always difficult to determine exactly when a bull run starts, certainly much more difficult than pin-pointing the time a crash starts. Typically, a bull run always starts gently. The prices tend to bump along the bottom for a while before starting up and even after it has started, there may be a few false starts when the rate of rise would falter. With that caveat in mind, it is my opinion that the bull run started in Jan 1971 and the big marker break (that is the start of the crash) occured on 13 Feb 1973, an up-cycle period of about two years.....

The amazing fact is that in 1971 and 1972 could be regarded as bad years economically for Malaysia while 1973 and 1974 were, in fact very good years for both Msia and Singapore. Yet the latter two years coincided with the sharpest fall in the history of Msian/S'porean stock market. STi fell by 41% in 1973 and 42% in 1974.

Until after June 1973, the Malaysian stock market and the Singapore stock market were joint. The whole market was therefore affected by the economic well being of Malaysia. In the early 1970's Msia/S'pore was still very much an export-oriented region. The prosperity of many quoted co's in the stock market was much dependent on the export of primary commodities.

What were some of the factors which caused the big boom?

(1) Early profit was made

after May 13th incident of 1969, investors' confidence sank to an extremely low ebb. there was a very considerable amount of panic selling and the Straits Time Industrial Index dropped to a low of 130 in late 1970 from 170 in April 1969. Many shares were being sold at an extremely low level. The few investors who had the courage to buy then were to make hefty gains later on.

... even after another more than 40% rise in the overall price level by 31 Dec 1971, many of the stocks, were still very reasonable, especially the second tier stocks.

The early profits attracted a lot of investors into the market and again, the prices rose and by June 1972, ST had increased by another 20%. However from this point onwards, the people entering the markets were no longer governed by economic considerations.

The prices were to be increased by yet another 81% in the next six months (WAAAHHH), after which the end of the boom was in sight. By that time, the market had caught the speculative fever and price rises were no longer rational. The market was to rise another 41% in the final six weeks before collapsing. It is notable that the increase every six months got steeper and steeper. In the final three months or so, the increase of the index exceeded that of the previous 2 years! This rate of increase obviously cannot be sustained and the speculative mania ran out of steam and had nowhere to go but down.

... When a market is rising, everyone who goes in makes some profit and he is therefor encouraged to make further purchases. However, the continuous price increase cannot go on forever. At some point of time, the amount of money tied up is so high (at the highs, one lot of OCBC costs 50,000, a sum which was more than the selling price of two terrace houses at that point of time) (Fiyoh!!!! Now that's what u call BULL, eh?) that the buyer who buys in anticipation of a further rise will be forced to sell soon if the market is not going up. Once the market sees that a shares has stopped rising, the opposite goes into effect. The intending buyer will delay buying hoping that the price will fall further. This causes the weak intending seller to lower his price yet again. A spiral of forced selling at low prices is thus started and it tends to continue at ever increasing speed until eventually much, if not all, of the earlier rise is completely increased.

(2) Many were First Time Investors

For much of the 1960s, investment in the local share market was very much limited to the institutions, large corporation and a few well-off private individuals. The middle class was of a small number and wielded little economic power. However, with the Independence in M'sia and Singapore, the social spending of the governments were vastly increased and slowly a large body of middle class consisting of civil servants, doctors, teachers and other professionals were established.

Like the US of the 1920's investment opportunities in the late 1960's were the limited. Three months of fixed deposit was then paying 5% (Wahh... 5% now banyak lo). Naturally the stock market market attracted some of the money in circulation. As explained before, those who made profit early, attracted many others into the fold. The commentators of the time also pointed out an additional fact which caused a large number of first timers into the market. In late 1972, all teachers in msia received a considerable amount of back pay. The sudden receipt of an unexpected sum of money and the booming stock market at that time was all that needed to push many teachers into the market. Indeed in 1972, teachers' common room conversation was largely limited to the stock market. (LOL!!!! Wahh... so much happening inside ze teacher's in common room!!!... hohoho... playing shares when they are free??? )

These first timers had little idea of the economic principles upon which stock purchases should be made. Instead they relied on market talks, brokers' advice and self-proclaimed experts. (hehe... they become Sayur lor or some prefers to call it as Hong Kong Kai Lan) As a well-known Wall Street saying goes: 'Genius is a rising market'. the rapidly increasing prices gave all involved a vision of boundless prosperity and wealth ( hmmm... Grandiosity lo ). By the end of 1972, price rose to a level which could not be justified by any known economic standard.

... the price increase obtained were totally out of bounds of rationality. A PER of three digits is absurd by any standard but to the newcomers, PER was a meaningless measure. All they believed was that: 'If the prices had doubled in the past 6 months, they must be capable of doubling yet again in the next six months'. (ho ho ho... they believed that the stocks could really fly up, up and awayyyyyyyy hor!!... and today's high is tomorrow's low eh?)

(3) Rapidly Rising Foreign markets

(4) Trust in 'Blue Chips'

(hmmm.... is this where the common advise to buy blue chips come from?)

In the Crash of 1973, the top tier company was made much of finance, properties and a few old line companies such as Sime Darby and Haw Par. The enthusiasm for these top tier stocks was such that most others were largely ignored. The PER of the favoured stocks would rise to an astronomical level while for the less favoured, their PER would remain at a reasonable level even at the height of the speculative mania. The over-concentration of interest in a specific class of stocks naturally meant that the price rise would be even more phenomenal. Unfortunately, when the crash came, all stocks, favourites or otherwise, were brought down. Stock market crashes knew no favourites.

The higher the stocks rose, the worse they fell. Many ex-market favourites lost over 90% of their peak price. Local newspapers reported many cases of bankruptcies and several cases of suicides directly attributed to the stock market collapse.

But stop it did as it must in all slumps. The severe losses that took place traumatised the speculators for many years. When the overseas market picked up in 1975, the Msian/Sporean market failed to do so decisively. The prices bumped along the bottom for many years until 1979. At the time, once again the lessons of history appeared to have been forgotten and Msian/Sporeans indulged in yet another speculative orgy......


The Crash of 1981

In magnitude, it is almost as severe as the first Crash.

First, it would appear that there were sound economic reasons behind the rise of share prices this time. M'sian/Sporeans had learnt sufficiently to depend on their own feelings on how the economy was doing rather than rely on foreign indices. (Ahhh... the problem of de-coupling our own market from others... be independant lo) At the time of the beginning of the bull run (approx Jan 1979), both Dow Jones and Financial Time Indices were in the doldrums. The local economic environment at the beginning of 1979 was vastly better than that of 1970.

(the tables in the book.... showed that price of rubber went from 1.99 to 3.25, price of tin went from 18,736 per ton to 35,710 and CPO went from 882 to 1177)

.... commodity prices were approaching or just below their respective all time high. Most of the companies directly or indirectly involved in the commodities business were doing extremely well and were flush with cash.

... per capital GNP had been rising most steadily for five years at an average of about 15 per cent. More than that, the private sector was very liquid with cash. In 1979, the money supply of Msia was standing at a figure that was five times higher than in 1971!

With profit increasing at a rapid rate, a PER of 20 or more seemed fully justifiable. (yeah... look at Cycle... price went from 2.62 to 5.25, and yet the PER only increased from 10 to 13... there is growth!!) As the memory of 1973 faded away and the mood of the country totally changed (market sentiments lo), stocks were once more respectable investments. Thus, more and more Msian/Sporeans invested and saw their investments steadily increased in value...

Secondly, the timing was right this time. In 1978-1980 the economic horizon was bright and it was natural to envisage an extended period of prosperity. Indeed the governments did promise just that. It is natural to bid up the price of stocks at the top of an economic cycle and until mid-1980, the prices of most stocks were very reasonable. Not many people, if any, could have foreseen the recession of 1982 (two years away still)

Thirdly one could detect several signs of market efficiency which was most surprising in view of what happened in 1973. Even at the height of the speculation some shares were being quoted at very reasonable prices. At the maximum level Bata, C&C, SIn Heng CHan and many others could be bought at a PER of less than 20. Given the Msian/Sporean context, the PER reached could be considered rational. Purchases even at those prices would not have been unwise investments if the region's growth rate of the late 1970's were to continue into the 1980's. Furthermore, it is noticeable that many of the plantation and tin mine stocks turned down well in advance of the general market. Many plantation stocks peaked in 1981 and most tin stocks even earlier on. This can be shown by comparing the KLSE Industrial Index with the prices of popular plantation and tin stocks. Considering that the poor corporate reports were not to be published for yet another year, this was a very creditable performance. A considerable number of investors must have taken note of the softening price trends of rubber, cocoa and tin at the point of time and started to liquidate or reduce their holdings.

It must be stressed, however, that despite these pockets of efficiency by late 1980's, the usual symptoms of a speculative mania were making their appearance. Trading on the stock market became more and more widespread among the populace. The mania was slowing taking hold in the minds of the people and soon many of them would throw rationality to the wind.

By early 1981, the mania had once again reached epic proportion. The prices again showed the accelerating rate of increase that is common to all manias.

Once again, a large number of ignorant and inexperienced people were attracted to the stock market. Remisers set up operations in every small town and did roaring business. In a typical small town like Teluk Intan, butchers, rubber merchants and small holders from the surrounding areas would crowd into town in the afternoon to take part in the rush to buy and sell shares. Even the universities were not immune to the temptation of the market. Many lecturers from each of the local universities were heavily involved. Housewives of all ages spent their days at the brokers' offices, no doubt finding it more exciting than a game of mahjong. (LMAO!!!..... hohoho.... mania!! Err.... Lecturers involved again? Soooo does this mean that these buggers are great BULL indicators???..... and kakaka.... if 2nd Auntie is so busy playing mahjong.. then u know stock market ain't too happening hor!!! )

The Conglomerate Game.

.. the value a speculator places on a stock (or a tulip) does not necessary depend on anything which is tangible. Rather, it depends on the image or fantasy the investor may have on a particular stock. A company that is continuously in the public eye ( a result of a continuous stream of announcements of bonus, rights, takeovers and profit forecasts, etc.) is that much more likely to become the object of such fantasy. ( Aha!!... got fancy CREATIVE story to sell??) In the same way, an actress who is always in the news is far more likely to become the object of a man's fantasy. Stocks of such companies are far more 'attractive' (sexy stocks?) and are more likely to be bidded up to a far higher level than the dull 'never-anything-happens' type of stocks.

... Indeed the activities of several companies during 1980 and 1981 fit the description. they are the companies that were busily engaging in takeovers and mergers ( for example, MUIB, Hong Leong Industries and PEGI). With the announcement of each new takeover, their profit forecast would become greater and their prices attain a higher level. It would be indeed be foolish for these companies not to make use of their new found strength in the form of high stock prices to seek new takeovers by an exchange of shares. More takeovers led their prices to go even higher and an upward spiral took shape. What was realised by the public did not necessary mean higher per share earnings. This is because a lot of new shares had to be created to 'pay' for the takeovers. (ze dilutions effect lo!!!... BE WARNED! ) Therefore, the per share price should not necessarily go up between overall and per share share earnings was lost in the general madness to pursue high-flyers. Most of the newly-fledged conglomerates saw their stock price increase to a level that is ridiculous by any measure.

The Property Injection Game

Owing to various government and institutional obstacles, it has become increasingly difficult for a Malaysian company to become publicly listed. (Oh my, how times have changed!) For the five years prior to 1981, only a handful of new companies each year had reached such exalted rank. This naturally resulted in a great deal of impatience among entrepreneurs who were anxious to have access to the public capital market. Over the previous four or five years, this impatience had manifested itself in the form of an increasing number of entrepreneurs buying over control of a listed company and injecting his own properties into the listed company as a way of achieving public listing. Since taking over a successful company is not cheap, these entrepreneurs naturally turned their attention to less successful companies ( yalor - the lousy ones - ones that wud stretch and bend ze rules sikit!! ) , in particular, textile companies which were going thru a poor earning stretch.

... On taking over a moribound or semi-moribound listed company, the entrepreneur would use it to takeover their existing assets by a process which is locally known as 'injection'. Most of these assets being so injected had been real properties (ie pieces of land). To the local share buying public, real estate had a magical ring to it for did we all not know that: "All real real-estate developers are rolling in money?" Given this fantasy image of real-estate development, every time the re-organisation of a moribound listed company into a real properties development company was announced, the public went wild bidding up the price of the previously moribound or semi-moribound company to incredible heights. Not only was there an enormous enthusiasm for companies actually being re-organised this way, the speculation spilled over the companies which might be taken over.

This when Taiping Textile was being reorganised the stocks of South Pacific textile, Imatex and Textile Corporation all went up in sympathy even though there were NO concrete news. As mentioned earlier, since the 'Property injectors', were only interested in moribound or semi-moribound companies, we have the most curious phenomenon whereby stocks of companies which would normally be considered as not particularly good, were bidded to an unjustifiable level even for a good company.
(The Goreng of the Chekai and Lousy stocks????)

The End is Near

Thus, if one were to refer to a list of most active stocks for the two years before the Crash of 1981, one would see that much of the activities centred around either conglomerates or re-organised companies or companies rumoured to be facing re-organisation. The day of reckoning arrived when the prices were bidded up to a ridiculously high level and when weak holders become anxious. Like in all slumps, once nervousness started to appear, confidence rapidly ebbed since it was not based on anything tangible in the first place. The market peaked on 26 june 1981, and lost rapidly almost HALF of its value within the next four months. there were a few anaemic attempts atrallying which all failed to go very high. This went on for about eight mnoths. In late July 1982, stock prices began to drop again, slowly at first and then sharply to result in a market loss of another 100 points.

( .... hmmm.... the dangers of using of year high and year low as an indicator to buy stocks lor ... cause .... if one used such indicator as a guide.... surely KENA big, big time lo .... so think it is wise to use a contrarian approach to buy a stock based on low prices?)

There is an ironical twist in the end of the story if the Crash of 1981. The market went down rapidly from a high of 823 on the KLSE to reach a low of 364 after fourteen months. This means a decline of about 58% in just over an year, a very rapid fall by any standard. One would expect it to continue falling further and stay down for a while to catch its breath as in most speculative collapses. This however, did not take place as the local speculators did not seem to have suffered enough and the market started moving up again toward the end of 1982 and was to reach a very high level of 680 by Feb 1984. Most local speculators were ecstatic over the unexpected rise and most local stock market commentators were expecting renewed climb to new heights for 1984. Once again, the unexpected happened and 1984 turned out to be another bad year for local speculators.

The Crash of 87!

At the time of writing (June 1988), it may be premature to write the history of 1987Crash as the full story of this crash has not yet been revealed. (Aisehhhh... what la.... !!.. I told you this little book is OLD what!). However, the global stock market crash of Oct 1987 has become part of the folklore of the investment world and it would be negligent if this story is left out.

In some ways, it is more difficult to get a 'handle' of this Crash than the two Crashes previously described. There were no obvious villains as in the earlier crashes. The bull market was intense and broad based, to be followed by a crash of unprecedented severity. The amazing thing to most casual observers of the market is that the crash took place just as both Msia's and Spore's economy were getting into full steam after two years of unprecedented low growth.

It is to be admitted that the economy of both countries were expected to do well in 1987/88 compared with the previous two years but the growth rate which has been achieved is low if compared with the heydays of say 1975 or 1981 when the economy grew at twice this rate or more. In spite of the mediocre economic rate, the stock market put up one of the best performances ever.

... It matched the growth rate of the bull market of 72/73 all the way.

From the start of bull market up to its peak, the SES All Shares nearly doubled while the KLSE increased by 167%. This is to be contrasted with an expected total growth in GNP of about 15% for 1987 and 1988. An examination of the earnings trend of the listed shares on both exchanges is even more telling. Apart from commodity companies and certain turnaround situations (eg Cycle & Carriage), the improvement in EPS between 1986 and 1987 is not particularly remarkable.

The increase in the EPS between 1986 and 1987 is only 18.7% for the Sporean stocks and 34.6% for the Msian stocks. Their March 1986 PER (based on 1987 EPS to allow for the expected increase in EPS) at the start of the bull run were not particularly low by usual financial standards (respectively 13.8 and 21.9). At the peak of the bull run, their PER can be said to be very high indeed and probably not sustainable.

The experience of the non-blue chips more or less mirrored that of the blue chips except the former were more extreme in their movements. In spite of the none-too-low PER level of the majority of the stocks in March 1986, the market took off in the classical manner with an ever increasing rate of increase that is so typical of a speculative stock market boom. Readers may like to compare it with the rate of increase experienced in the previous two booms described earlier.

Thus by Sept 1987, many local stocks were selling at prices which were completely out of line with the fundamentals. [ same symptoms lo - prices went totally out of whack!! ] The earlier two tables in message 33 and 34 shows the PER of a selection of stocks at the top of the market compared with the highest PER during the previous bull markets. It is safe assumption that the shares do indeed look expensive compared with previous stock market tops.

Why should the market height it did, if there are no strong fundamental reasons to account for? (LOL!! No strong fundamental reasons? Kaki-kia?)

Influence of the Foreign markets

There is little doubt that the four years up to 1986 saw one of the best periods for stock markets worldwide. It is interesting to compare the performance of the various stock markets of the world between 1982 and 1983 to that of the local market.

.. the local market was the only one which had done badly in the four years preceding 1986. Furthermore, by Jan 1986, local bear market was 26 months old, a very advanced age for a bear market. Given the very powerful psychological stimulus provided by the continuing strong advances in most major markets, it is not surprising that local investors took heart and got the bull market underway.

Local commentators also attributed foreign buying ti giving the market further impetus. There is no doubt that there was some foreign buying although the exact quantity is unknown. A figure of US$2-3 billion has been cited by various commentators. This figure us quite small relative to the overall capitalisation if the market (US$50 billion, at the peak). However, given the poor liquidity of the local market, foreign buying could give quite a boost to the local prices.

Low Local Interest Rate

Due to a combination of factors, interest rate sank to a historically low level by early 1987. In Singapore, interest rate reached a peak in 1980, declined quite sharply in 1981 and held steady from 1982 to 1984. In 1985, interest rate in Singapore started to decline again, by early 1986 the three month fixed deposit rate was down to 4.5% and by early 1987 it was down to 2.85%.

In Msia, the decline in interest rates was even more precipitous. The interest rate hit a peak in 1984 with the three month fixed deposit rate reaching 10.5%. The rate declined to 7.25% in 1985 and 6.25% by end of 1986 before diving down to 2.5% by mid 1987. ( WOW!!! that's a sure DEEP falling rates!!!... and with such low interest rates... where to put ze moola??)

In the face of interest rate being less than the average dividend yield of the stocks at the time, is not surprising that large amounts of money flowed into the stock market, thus driving up the prices.

Economic Recovery

For both countries, 1987 was an incredible turnaround year. Both countries achieved the highest growth in five years. The improving economy meant higher income for the people. Even more than that, the psychological impact of a good year after two dismal ones must have been very great. Everyone must have felt as if a great weight had been lifted off their shoulders and the general cheerfulness and good feeling may have contributed to a great deal of optimism about the market.

Lack of Other Investment Avenues.

The lack of other avenues of investment is an important factor for a stock market to boom to reach speculative proportion. In 1986/87, this condition was fully met. The only other investment alternative apart from stocks and deposits, for laymen was in houses. By 1986, the housing market in both countries was in a severe slump. What is worse, the slump did not look as if it was going to end soon. There was therefore totally no incentive for investing in homes.

Granted that there were good reasons for going into the share market, it is understandable that the market should have gone up. But what is not comprehensive is that why should the market go up so much especially for the Malaysian stocks.

I feel that once again, the local stock market players had let their emotions take over from their senses. A more charitable interpretation would be that the typical investor still did not have an understanding of investment fundamentals such as PER and DY. In this sense, they were no better than the players of the previous speculative booms. Once the market went up strongly, they would enter the market, attracted not by the value represented by the shares but by the mere fact that they have gone up so much. The market went into a self-sustaining upward spiral. (LOL!!!... kaki-kia dude!!!)

...(As we can see from the tables in the book) the PER (most of them 3 digits PER some had PER over 230!! and most had NM (not meaningful) PER cos they were companies which were losing money!) were typically so high that prices could not be sustained once the reasons for the rise in the first place disappeared.

Thus, once the collapse hit the other markets, the interest in local market largely vapourised as well and the market took a plunge of unprecedented short term severity.

The tables (in the book) shows the magnitude of the fall amongst a selection of speculative and investment grade shares. Once again, the volatility of the local market was clearly demonstrated. Even though our market started moving up much, much later than the major markets, our decline was more severe than any of these except hong Kong. Latecomers to the speculative scene once again must have suffered enormous losses. (err... buy high, sell ... ???)

Conclusion.

These three adventures to Manialand have shown all too clearly that local investors are still far from rational in their approach to investment. Their behaviour in 1987 was not much improved from that of 1973.

If anything, what can be noted is a very disturbing development, the local market seems to have become more speculative not less. (Ahemmm... now? any changes? ...how? ) The first truly speculative boom of modern time took place in 71/72 and there was a gap of over 8 years before the next speculative boom (that of 80/81) took place. But after the boom of 80/81, there were 2 more episodes of speculation within a space of seven years.

An even more disturbing fact is that the local market has not effectively progressed since 80/81. Between 70 and 80, the local market gained about 400%. But from 80/81 to 87/88, the market hardly moved at all. What this means is that had an investor bought near the top of the market in 1973, he would have bought in at the top of the market in 1981, many would still be out of money today.

~~~~~~~~~~~~~~

the ENd.

Stock Market Investment - Neoh Soon Kean
Berita Publishing Sdn Bhd. 1989 (ISBN 967-969-066-0)

~~~~~~~~~~~~

And what about the crash of 1987?

Here is a highly recommendable reading.

Published on the US Federal Reserve Board and written by Mark Carlson.

• The 1987 stock market crash was a major systemic shock. Not only did the prices of many financial assets tumble, but market functioning was severely impaired. This paper reviews the events surrounding the crash and discusses the response of the Federal Reserve, which responded in a number of ways to support the operation of financial markets, including the provision of liquidity, in a highly visible fashion.

Click here for the full report: Full paper (186 KB PDF) Full paper (Screen Reader Version)

ps: Hope you enjoyed it! I did!

Cheers!