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MARKET'S CRASH WAS CALL TO BUY

Hy Scheff remembers all too well that day, 10 years ago today, when the stock market crashed.

"It was terrible. You really couldn't work because you had stomachaches," says Scheff, a vice president at A.G. Edwards & Sons Inc. in Amherst. "You were watching your money disappear."

And disappear it did. In a single day, the Dow Jones industrial average plummeted by 22.6 percent, or 508 points. It was the Dow's biggest daily drop in history. And when Monday, Oct. 19, 1987, was done, the combined value of all U.S. stocks was about $1 trillion less than it was before trading began.

Yet Howard Ewert, a Colden investor who is the co-author of the Sixth Sense investment newsletter, remembers Black Monday with far less pain.

"I said, boy, are we going to have opportunities after this," recalls Ewert, who had been building up cash for most of 1987 and went on to invest in 30 different stocks during the 45 days after the crash. "People were dumping stocks," he says, which allowed him to buy them at much lower prices than before the crash.

In the end, Ewert's courage, which allowed him to buy stocks in the midst of the stock market's darkest period in more than a decade, paid off handsomely. Since the Dow closed at 1,738.74 after Black Monday, the index has zoomed by 351 percent, in spite of last week's sharp downturn.

If nothing else, Ewert's reaction to the 1987 crash -- to buy when the market drops substantially -- has become the most lasting legacy of Black Monday, with millions of individual investors adopting the view that sell-offs are buying opportunities.

"It was the first major market break that taught people it's a buying opportunity," says Francis G. Leonard, the president of Courier Capital Corp., a Buffalo money management firm. "The big lesson that was learned is a big reason why we are where we are today."

Indeed, investors typically are pouring $10 billion to $20 billion into stock mutual funds each month, regardless of whether the market is going up or down. That steady flow of money into stocks has given the market a resilience that has kept it from falling by 10 percent or more at any point during the last seven years.

"The crash was a verification that long-term investors win the race," says William A. O'Loughlin Jr., senior vice president at Essex Investment Group Inc., a Williamsville investment advisory firm.

That growing faith in stocks as long-term investments also has been helped by the boom in employer-sponsored 401(k) retirement plans, which were still a relatively new idea 10 years ago.

At the end of 1987, there was about $190 billion invested in 401(k)s, with $18 billion of that amount in mutual funds. By the end of 1996, 401(k)s overall had ballooned to $675 billion, with $261 billion of that money in mutual funds. The amount of mutual fund money invested in individual retirement accounts has grown from $15 billion in 1987 to $41.5 billion by the end of last year.

Black Monday also proved to be a reinforcement of the age-old belief that investors who don't panic eventually will come out ahead. "If people would have left everything alone, they would have recovered everything in 15 months," says Rosemary A. Ligotti, senior vice president at Moors & Cabot Inc. in Amherst.

Those lessons have not gone unnoticed. "I think 1987 introduced major changes in investment attitudes," Leonard says.

"Bear markets in the past tended to correct attitudes and make people stand back and take measure of the whole market," he says. "1987 introduced the concept of a major, quick bear market that's over in a week and you don't have to rebuild yourself psychologically before you start buying again."

Of course, a 508-point drop in the Dow isn't as painful as it used to be. Because of the market's sharp rise, the Dow would have to lose about 1,800 points today to duplicate the 22.6 percent drop that occurred on Black Monday. And a drop of that size would only wipe out the gains the market has made since April.

Yet some local investment advisers say that, with stock prices now at historically high levels, the frightening reality of the 1987 crash is only a dim memory to many investors.

World has changed greatly

"The scars of the 1987 crash are healed and invisible," Scheff says.

"They do not remember that stocks can go down. They're all very complacent," he says. "People are only interested now in the return on their principal. They're forgetting to be concerned about the return of their principal."

But Ms. Ligotti says that feeling of complacency, along with high stock prices, are two of the few things that today's market has in common with conditions in 1987.

Today, the economy is in better shape than it was a decade ago. Long-term interest rates, which stood at 10.18 percent the Friday before the crash and were rising, now are 6.43 percent in a fairly stable environment.

Inflation also is much lower, with consumer prices rising at a 1.8 percent pace this year -- the lowest in the last 11 years and less than half the 1987 rate.

What's more, the world has changed greatly. The Cold War is over. An era of free trade has opened huge foreign markets. New computer technology has boosted productivity, while companies have strengthened their profits through relentless cost-cutting.

Collars and circuit-breakers

"The economy is in this wonderful state of tranquility, balance and peace," Ms. Ligotti says.

But that doesn't mean there won't be another crash or a steep, prolonged sell-off. Local investment advisers say it's only a matter of time before one settles in.

When it happens, experts say the U.S. stock markets are in better shape to handle a steep decline than they were 10 years ago.

After the crash, the New York Stock Exchange implemented what are known as collars and circuit-breakers that officials hope will make it harder for stocks to go into a free-fall.

Perhaps the best-known of the collars are the uptick and downtick rules limiting some computer program trading -- which tends to increase volatility -- whenever the Dow rises or falls more than 50 points from the previous day's close. With the big moves in the Dow in recent months, the collars have frequently gone into effect.

More drastic are the as-yet-unused circuit breakers, which halt trading for half an hour if the Dow falls 350 points from the previous close, and an hour when it falls 550 points. Last year, because of the big gains in the market, those thresholds were raised from their original 250 points and 400 points.

In addition, the NYSE has greatly increased its trading capacity after the Big Board was overwhelmed when 604 million shares changed hands on Black Monday, at a time when it was set up to handle only about 400 million shares a day.

Today, when it's not unusual for volume to top 500 million shares a day, the NYSE now says it can handle about 2.5 billion shares a day.

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