Lesson 3 of 7
The 1987 crash
The one-day crash of October 1987 sat inside a calendar year that still finished up 5.1 percent, and forced selling made the day worse than it needed to be.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- Shares fell sharply in a single trading day in October 1987, the sharpest one-day move the exchange had recorded.
- The full calendar year still finished up 5.1 percent with dividends, because prices had risen strongly before October.
- A strategy that sells more stock as prices fall, run by many holders at once, can turn an ordinary decline into a self-feeding one.
Black Monday was a single trading day, October 19, 1987, when share prices fell further in one session than the exchange had recorded before. The calendar year the day sat inside still ended up 5.1 percent, once dividends are included, which is the part of the story a headline about one day leaves out.
One sharp day inside a positive year
- 198618.6%
- 1987 · includes October's crash5.1%
- 198816.6%
One day, then a full year
The single session in October is what the date is remembered for. The calendar year it sat inside was not a losing one. Reading only the one-day figure and reading only the full-year figure both leave something out: the first misses that the months around it were strong, and the second hides how sharp the single day was.
What made the fall self-feeding
A strategy called portfolio insurance was part of the story. Buffett's letter that year, citing the Presidential Task Force on Market Mechanisms (the Brady Report), put the equities poised on this hair trigger in mid-October at $60 billion to $90 billion. The strategy sold more stock, or index futures standing in for it, as prices fell. Run by enough holders at the same time, it instead added selling exactly when the market most needed buyers, feeding the fall it was built to guard against.
Mr Market speaks again
Buffett's letter that year restated Graham's Mr Market allegory, the idea that a daily quotation is an offer from a moody partner, not a verdict on what the business is worth. "Mr. Market is there to serve you, not to guide you." Written in the letter dated February 29, 1988, four months after the crash, the point was that a quotation's size on any single day says nothing about the business behind it.
What changed afterward
After the crash, US exchanges adopted trading halts, known as circuit breakers, that pause the market once prices fall far enough in a session. A halt does not stop a fall or ban any selling rule. It interrupts a cascade so that buyers have time to arrive.
Check yourself
How did the S&P 500 with dividends finish the full 1987 calendar year, which included the October crash?
- Down sharply for the year
- Up 5.1 percent for the year
- Flat, neither up nor down
Show the answer
Answer: B.
The single day in October was the sharpest fall on record, but the months around it were strong enough that the full year finished up 5.1 percent with dividends.What did a portfolio insurance strategy do as prices fell in October 1987?
- Bought more stock to average down
- Sold more stock, adding to the fall it was meant to protect against
- Had no effect on how much stock traded
Show the answer
Answer: B.
The Brady Report found that selling designed to protect one portfolio, run by many holders at once, added to the very decline it was meant to guard against.What did Buffett's 1987 letter say a daily quotation is for?
- Telling you what the business is worth
- Serving you, not guiding you
- Predicting the market's next move
Show the answer
Answer: B.
Restating Graham's Mr Market allegory, the letter's point was that a quotation is an offer to use, not a judgement on the business to defer to.Sources
- Berkshire Hathaway shareholder letter, dated February 29, 1988, restating Graham's Mr Market allegory and citing the Presidential Task Force on Market Mechanisms (the Brady Report) on portfolio insurance.
- Berkshire Hathaway 2025 annual report, table "Berkshire's Performance vs. the S&P 500": S&P 500 with dividends, by calendar year, 1965 to 2025.
What this leaves out
- Annual figures only; the single day's fall is not shown.
- The selling-rule example is a round, invented illustration of the mechanism, not the actual formula any real portfolio insurance strategy used.
- Nothing here is advice about any security or trading strategy.