16/10/2007 - 22:00

From the vault: Market fundamentals shift

16/10/2007 - 22:00

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The panic that unfolded on the Australian stock market 20 years ago this Saturday began early for some Perth stockbrokers and advisers, who are still in the game today and comprise an increasingly rare breed in the industry.

The panic that unfolded on the Australian stock market 20 years ago this Saturday began early for some Perth stockbrokers and advisers, who are still in the game today and comprise an increasingly rare breed in the industry.

Many of these brokers younger colleagues are yet to experience a stock market crash like the one that sent Australia’s all-ordinaries index plummeting 25 per cent on Tuesday October 20 1987.

Veteran stockbroker Bruce Benney had been in the industry for about three decades and remembers the day well.

Mr Benney received a phone call at 5.30am from a panicked client who had heard about the fall on the US stock market overnight. The Dow Jones index had plunged 22.6 per cent.

“I thought I had better go to the office and see what was going to happen so I got dressed and went straight to work,” Mr Benney remembers.

“The market wasn’t open at that stage but the question was ‘what do you do?’”

The Australian market opened and stocks tumbled, even the reliable blue chips.

Mr Benney, who was then running his own business, BS Benney & Company, said most advisers were forced to “sit back and watch it all happen”. Buyers had fled the stock market and left stockbrokers stranded.

Many of those stockbrokers were then stung, with long settlements for stock purchases and a relatively easy line of credit exacerbating the situation, as well-known Hartleys Ltd stockbroker Ian Parker recalls.

In those days, Mr Parker was a young financial planner, playing the markets as many of his peers did.

Mr Parker recalls he had a $20,000 line of credit in the form of a leather bound cheque book, probably from an institution like Broadlands Finance, one of many that no longer exist.

This form of unsecured lending cost 21 per cent interest which, the broker recalls “didn’t matter because you were sure of making more than that”.

In addition, transactions could take up to 10 days or longer to process, allowing debt-fuelled trading to take place faster than the paperwork could keep up.

“Floats we almost a licence to print money, you had a guaranteed stag premium,” Mr Parker said.

The consequence of that was new listings were hard to get into for everyday punters, which drew investors to Perth’s second board, which was very lightly regulated and almost anything could make it to market.

Mr Parker even recalls the Cable Water Ski Park was listed in that manner back then.

“There were no earnings; it was just a speculative fever,” he said.

Mr Parker said Black Tuesday, as it became known in Australia, had far worse ramifications for him because he and some investment club mates had bet heavily on the futures market the previous Friday, expecting the US markets to bounce back on Monday.

They never did, wiping out their positions entirely.

Over at the office of Patersons, administration assistant Eve Broadley, now a director of Hogan & Partners, was digesting the fall-out. She and some colleagues spent the following three days locked in the company’s boardroom working out the firm’s exposure.

“It really was a horrendous short fall,” Ms Broadley said.

“The dealers were told they could do nothing for the next week but to collect their debts and I think Patersons came out of it better than most.”

She also remembers that the firm had installed a new phone system that day, which didn’t work properly and made a terrible day just that much worse.

“The programming wasn’t quite right and people were getting other people’s calls,” Ms Broadley remembers.

“The phone technician stayed until 1am to make sure it would be right for the next day.”

Bell Potter Securities head of wealth management Heather Zampatti, who was then working for Bain & Company, remembers the sense of disbelief in the office.

“There were company codes that you knew inside and out but you had to look them up again and double check because the share price was just so different to the day before,” she said.

Terry Hogan, who established Hogan & Partners with Ms Broadley in 1992, was managing the Patersons business at the time of the 1987 crash.

For him there were two things to learn from the experience.

One was the resilience of the market, which rebounded quickly in the US and eventually ended on November 11 1987 in Australia.

“The market doesn’t stay down and that is a good experience,” Mr Hogan said.

“The second lesson is that the era where a market was driven by personalities like Alan Bond, Christopher Skase and big-name entrepreneurs has disappeared.

“Today, companies like Wesfarmers are Wesfarmers, not Richard Goyder. The scale of companies has moved beyond the characters that were playing a private game.”

 

Rebuilding after a lifechanging event

Mark Pownall - Comment

 

Stockbroker Ian Parker reckons he was scarred by the experience of 1987; that the evaporation of his newfound wealth and his early understanding of how investment worked affected him for the rest of his life.

In the two decades since, he’s rebuilt his wealth and career, ironically turning to broking in the wake of the ’87 crash.

Mr Parker said he’s done that with a cautious approach to investment and debt which has resulted from the impact of that day 20 years ago.

“We are a little like that generation that lived through the depression,” he said, recalling an older generation that learned through much greater hardship to avoid debt.

But Mr Parker thinks being too conservative could be the wrong mindset in this boom.

“I worry that people like me are too debt averse, too cautious,” he said.

“You don’t actually get rich if you don’t take a risk.”

Wise words indeed.

Many of those in the financial world will remember those days. The scars are different for everybody.

I know a few families who lost everything, their paper profits turning to dust and, in one or two cases, their bank foreclosing on their property at times of record interest rates. Their lifestyles, relaxed and comfortable rather than outrageous or over-the-top, simply disappeared.

We didn’t really talk about that stuff, but we quietly sympathised.

Personally, the ’87 crash was a watershed moment. I had just secured my first job, in a finance company in West Perth, and planned to continue my studies part time while making the most of the opportunity booming Perth had to offer.

Within two days of the crash that job had gone and I had a new opportunity – to reconsider my own future.

In hindsight, it was a blessing in disguise. I had little to lose at that moment in my life and, having watched those around me lose money, I chose to redirect my energies towards becoming a journalist.

As a reader, you can decide whether that was a good thing or not.

However, such choices have their costs. Despite many years exposure to an entrepreneurial environment – initially with family and most recently here at WA Business News – I have also felt cynical about how long this boom can last.

Then again, maybe that’s just what being a journalist is all about.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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