Learn from the Plunge
Dateline: 04/17/00Black Monday it was called. October 19, 1987 the New York Stock Exchange lost 22.6% of its value in a single day. Why that happened, and its aftermath, are detailed in other articles.
It is too recent to have a name yet, but last week the NASDAQ composite index lost 25 percent of its value. The index plunged almost ten percent on Friday alone, based on emotion rather than fundamentals. It is too soon to know whether this decline has ended or even to have agreement on what caused it. It is not too soon to learn from it.
What we will look at here are lessons we can learn from these crashes, and how to apply them to non-treasury functions of your company.
The Second Great Depression
The crash of 1929 cut the Stock Exchange by 12.8% and it was followed by what we refer to as the “Great Depression.” Yet the much larger drop of 1987 produced barely a ripple in time. The Dow Jones Average actually finished higher at the end of 1987 than it had started and had recouped its losses within two years. There was no “Second Great Depression.” The precipitous drop last week has not yet caused even a bear market.
Plan for the Worst Case
It is not my intent to minimize the 1987 crash and its toll on people or the impact of last week's loss of $2 trillion (USD) of value on peoples finances. I simply point out that it could have been a lot worse. Why wasn’t it? The 1987 crash had less severe consequences because major financial organizations, chief among them the Federal Reserve Board, had made plans for how to deal with a similar disaster if it occurred.
When the Stock Market collapsed, the Fed, and related organizations, took steps immediately to lessen its effects. Their plan was put into action. What those steps were is detailed elsewhere. For our purposes it is only important to recognize that there was a plan and that it was implemented immediately.
What We Learned
The important lessons from these Stock Market collapses then are these:
Disasters will occur
Have a plan before the disaster hits
React with urgency, but don’t panic
Ride it out
These same lessons apply to non-treasury aspects of the business. Here is an example:
One Major Client?
Have you noticed that the percentage of your business coming from one client has grown gradually over the past few years so that they now account for 30 to 40 percent of your business? What would happen to your company if that customer stopped ordering from you?
Disasters do occur: What you would do if something happened to that major client? They could have a fire, their CFO could embezzle their cash and disappear, a consumer panic (like e-coli) could dry up their sales overnight.
Have a plan before the disaster hits: Have you discussed with your key people what you would do if that major client abruptly cut their business with you? Would you cut production, offer price breaks to other customers for increased volume, find overseas markets? Prepare that plan today. You can’t wait for the crisis to happen. You won’t have time then.
React with urgency, but don’t panic: Once you have a plan, everybody knows what to do when the crisis hits. This gives you an advantage over your competitors, because, while they are thinking, you are acting. You know who will handle the press inquiries, who will contact your supplier, who will call the bank. You are moving quickly, but there is no panic, because you had a plan.
Ride it out: You had a plan, you executed it well, you adjusted it as needed. You have done all you can. Recognize that “tomorrow is another day” and move forward.
Keep Learning
The valuable lessons we learned from the crash of 1987 and the "plunge of 2000 are important to all areas of business. This is just one example. However, once you get your people thinking ahead you can plan appropriate responses for other potential problems with greater ease.
Work on the big problems first. Focus on the things that could shut your business down. Then look at the other things that, while not fatal, could seriously damage your company.
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There are additional resources here on About.com relating to the stock market and to the lessons to be learned. Here is just a sampling:
- Stocks GuideSite
Up-to-date data financial news and trends. - Day Trading GuideSite
Daily market reports, brokers and more, from the fast-paced world of Day Trading. - Mutual Funds GuideSite
Research, brokers, best-rated funds, and more to help you minimize investment risk. - Stock Market Simulations
Stock market simulation links.
John --
If you have any questions or comments about this article, or if there is an issue you would like us to address, please let me know.
