Ansgar Schmetzer, a 37-year-old German living in California with his wife, had no children. His passion was investments, and he’d put practically all his money into stocks. He was extremely pleased with himself, as his portfolio had done extremely well during the five years he’d been in the USA.
Ansgar Schmetzer died, or more precisely, committed suicide early in the morning of October 20, 1987, the day after Black Monday. The stock market had fallen by more than 22% in just one single day – and his own investments by more than 39%. His wife said that he was still worth many millions, but for Schmetzer losing more than $4.8 million in a single day was more than he could bear. Even if he’d been able to accept the loss of his money, he couldn’t take the way his beliefs had been shaken. His portfolio consisted mainly of growth stocks and small caps, and had therefore been outperforming the Dow Jones and S&P 500 by more than 6%. Schmetzer had remained confident it would soon double or triple in value until less than a week before his death.
His confidence was not entirely misplaced. US stock markets had been growing nicely since the early 1980s. Then the market suddenly started falling. It fell 2.7% on October 6, 1987 and by smaller percentages over the next four days. On Tuesday, October 13 (the number 13 was always a lucky one for Ansgar Schmetzer and Tuesday was his favorite day of the week) the decline halted, and the market grew by nearly 2%. Schmetzer wasn’t particularly bothered by these events, as they were normal stock-market fluctuations. However, the next three days weren’t at all typical. On Wednesday, October 14 the market fell 3%, on Thursday 2.3% and, worse, on Friday, October 16, an additional 5.2%. But Ansgar Schmetzer hoped that the decline was over and that the next week would see another reversal of the downward trend. The US economy was growing strongly, corporate profits were high and everyone was predicting they were going to increase further in 1988. So, all in all, there were no signs of any trouble and he saw the decline as a way to increase his profits. For these perfectly sound reasons, Schmetzer borrowed money against his existing portfolio to buy more stocks at bargain prices on the Friday afternoon.
Monday, October 19, however, turned out to be the worst day in the history of the stock market. It was even worse than October 28, 1929, which kick-started the Great Depression. By the time he tragically ended his life, Ansgar Schmetzer had lost more than half of his money in just ten trading days. The shock was as great as if he’d been hit by a falling coconut – and his state of mind darker than the blackest Monday.
Although there have been many suggested explanations for Black Monday, none of them seems quite convincing – even with the benefit of hindsight. Today, it’s only when we hear about events like Ansgar Schmetzer’s suicide that we can begin to imagine how the entire financial world was taken by total and utter surprise on that Monday. The stock-market collapse of 1987 was what former trader, Nassim Nicholas Taleb, calls – in his excellent book of the same name, a “Black Swan” – a totally unexpected event with mammoth consequences.
© Spyros Makridakis, Robin Hogarth and Anil Gaba, 2009