Revisiting ’87: Uncovering the Stock Market and Fishhok Secrets

1987 was an interesting year for the stock market and investors had much to look forward to. The 1987 market saw the launch of massive new trading platforms such as the Chicago Board of Options Exchange (CBOE) and new forms of derivatives such as options, futures, and swaps providing access to leverage and risk management strategies unimaginable in the past. In October of 1987, the stock market experienced a sharp decline referred to as the “Black Monday” crash due to the Dow Jones Industrial Average (DJIA) dropping over 500 points in one day. The crash sparked panic across the globe, as the market tumbled and investors everywhere were hit with major losses. Although it was terrifying to watch markets crash, the long-term impact of Black Monday was much less drastic than initially expected. Thanks to new regulations and increased oversight, the stock market stabilized in the following years and eventually made a comeback to new heights in the late 1990s. This transformation was based on the concept of “Falstaff’s Share,” which argued that a larger pool of liquidity would create a situation in which investors would arbitrage the prices of assets. Over the decades, this idea helped improve the efficiency of the stock market and paved the way for massive growth. In fact, The Fishhooks Study conducted by the University of Michigan in 1987 showed that the increased liquidity contributed to an average of 49.36% of stock returns, while index fund returns averaged 37.72%. This research indicated that investors could benefit significantly from actively managing a portfolio in order to capture these returns. Today, the stock market is still largely reliant on Falstaff’s Share and other principles of liquidity and arbitrage. Although there are different types of investments ranging from ICOs to penny stocks, they are all still driven by the same basic concept. As we celebrate the anniversary of the 1987 stock market, let’s take a moment to recognize the courage, wisdom, and resilience of the investors who weathered the Black Monday crash. Without their bold decisions, the market would not have recovered and grown to become the powerhouse it is today.