THE VIRGINIAN-PILOT
Copyright (c) 1996, Landmark Communications, Inc.
DATE: Wednesday, March 13, 1996 TAG: 9603130502
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SOURCE: By TOM SHEAN, STAFF WRITER
LENGTH: Medium: 91 lines
For Ronald T. Dilks, one lesson from the stock-market crash of Oct. 19, 1987, was the need for calm.
So the manager of the Legg Mason Wood Walker office in Norfolk didn't take any chances Monday morning.
``I met with my brokers and told them not to overreact, that the worst thing anyone could do was panic,'' Dilks said.
For some industry veterans, the 171-point drop in the Dow Jones industrial average last Friday brought back memories of the market turmoil in late October 1987.
Following a 508-point freefall in the Dow average on Oct. 19, 1987, some financially strapped brokerage firms failed. Many other firms spent days sorting out mistaken trades. Securities regulators and securities exchanges began investigating the causes of the breakdown.
``It was traumatic. It blindsided us,'' said Dilks, who managed a Smith Barney office in New York City at the time.
Few, if any, industry veterans rule out the possibility of another sharp drop in stock prices. But changes in investors' attitudes, market conditions and technology have made a repeat of October 1987 unlikely, some brokers in Hampton Roads said Tuesday.
During that crash, the computers and telephone systems at brokerage firms and stock exchanges were overwhelmed by the sales orders.
``You couldn't get a lot of dealers in over-the-counter stocks to answer the telephone,'' said Larry Waters, a broker in the Virginia Beach office of Scott & Stringfellow Inc. ``Today, it's all done automatically.''
In the nine years since, brokerage firms and exchanges have spent billions of dollars on advanced computer systems to accommodate days like Friday when 544 million shares changedhands on the New York Stock Exchange.
One condition that distinguishes today's investors from those in the market in 1987 is a longer-term perspective.
``You haven't had the speculative rush to buy stocks'' that had become routine in 1987, said Thomas E. Love, manager of the Wheat First Butcher Singer office in Norfolk.
At least 75 percent of the funds coming into Wheat First's Norfolk office have been earmarked for retirement investments or to pay for childrens' college educations, Love said. These investors, he said, have learned to tolerate volatile swings in stock prices.
The mix of mutual-fund assets tends to confirm investors' increased interest in longer-term results.
At the end of 1994, the $716 billion invested in individual retirement accounts, 401(k) plans and other retirement programs accounted for one-third of the $2.16 trillion in all mutual funds, according to the Investment Company Institute, a fund industry trade association.
In contrast to 1987, fewer individuals buy stock today on margin, area brokers said. That reduces the pressure on investors and brokerage firms to sell the stock when prices are falling.
Margin accounts enable investors to buy shares with borrowed money. But if the prices of those shares drop, investors have to sell the stock or put up additional collateral with their brokerage firm.
During the 1987 market crash, many individuals could not come up the required collateral. But by liquidating their clients' margin accounts in a falling market, brokerage firms added to the downward pressure on stock prices.
``During the crash of `87, we had a lot of margin calls,'' said Legg Mason's Dilks. ``I can't recall the last time someone came into the office and asked to open a margin account.''
When stock prices plummet, as they did last Friday, Waters' clients are more likely to call and ask `` `What looks good today?' rather than say `Get me out.' ''
Partly because of the abundance of information available through magazines, newspapers and television, small investors are much savvier about market conditions than they were in 1987, Waters said.
In January, a record $28.9 billion of net new cash flowed into stock mutual funds, and another $21 billion flowed into these funds in February, according to estimates by the Investment Company Institute.
One reason for the torrent of money going into stocks and stock mutual funds has been the low yield available from alternatives, such as bonds and bond funds.
But if interest rates rose sharply and yields on high quality bonds climbed, some money would flow out of stocks and into bonds, Waters acknowledged. However, he doesn't see that happening because of the Federal Reserve's determination to curb inflation, he said. ILLUSTRATION: Color photo by Martin Smith-Rodden
Industry veteran Ronald T. Dilks on the 500-point market freefall in
October 1987
by CNB