The week before the 1987 crash was the worst week in market history. People don't remember that. They are under the impression that the crash was a one-day event.
The reality was that this was a seven-day event. It started the Monday before the event and led up to the day after the Crash, known as Terrible Tuesday. On that day, the Dow Jones Industrial Average momentarily ticked down to around 1200 -- and you could barely tell, things were that chaotic. That's a 50 percent decline in a week, for heaven's sake! Can you imagine taking a vacation with the Dow at 14,000 and coming back a week later and seeing it at 7000? You would think it had split!
I remember it candidly, because of a big fight I had with my then soon-to-be fiancée, Karen Backfisch. I had just started a fund, a hedge fund, after leaving Goldman Sachs (
GS) (
Cramer's Take) and I was struggling, barely up, in a wild market that had advanced amazingly all year. Starting a fund like that was pretty pioneering at the time. Not a lot of people left cozy places like Goldman Sachs to start their own funds in those days.
Karen was a professional institutional trader at another firm at the time, and she had been trying to move a lot of "merchandise" -- what the big traders call stocks -- and had been unable to find buyers for a couple of million shares of some very liquid stocks, stocks like International Paper (
IP) (
Cramer's Take) and Alcoa (
AA) (
Cramer's Take). That should have been child's play. But no one would bid for them. She couldn't sell them without knocking them down 2 points, or 3 points or even 4 points from where they were. That was ridiculous. She should have been able to sell them down 25 cents or 30 cents, max.
She called me at my new hedge fund in a panic that Thursday before the crash and said, "Sell everything, everything, this market is awful, it is going down huge." I told her, "Wait a second, Karen, it has already lost about 500 points." Meaning, how much more could it possibly go down? She said it could get cut in half, judging by how hard it was for her to unload stock; I said, "You have to be nuts." I said she was way too bearish.
She reiterated that I didn't know what I was talking about, that everything had to be jettisoned. She said, "Look, we are going to crash on Monday." I had never heard that word, "crash," other than when it referred to 1929. It is the most feared and dreadful word out there and we don't ever like to use it just because of the panic it invokes. But she scared the daylights out of me. So reluctantly, I sold everything that Friday, into a terrible market.
It was the most prescient call I have ever seen. Just remarkable.
I sidestepped a 508-point decline Monday and another close-to-500-point decline Tuesday, although the market managed to rally strongly as a bunch of big brokerage houses came in and turned things around midday.
This was a call that made my hedge fund a top performer and allowed me to beat most of the other funds that had been killing me up until that date. It also allowed me to raise hundreds of millions of dollars in new capital just because I could show a trading run that included that day and showed that I had no stock positions.
Sure, sounds pretty smart. However, not only was it her call, but two days later I sat paralyzed, not willing to get back in for what might have been one of the last great buying opportunities in the last 20 years. You know why I didn't?
Because, and I know this is hard to imagine, you couldn't tell where stocks were really trading. The machines -- the computers that showed the prices -- were all wrong. Stocks were trading in 10-point increments and swings, and I don't just mean the $200 stocks, I'm talking about $40 and $50 stocks.
You couldn't tell what was happening. Plus, you didn't even know if you would get the stock you had bought. That's how fragile the system was.
My takeaway from that moment, the takeaway that you can use right now -- because there always has to be a takeaway from these moments in time -- is that you must never be as complacent as I was. You must always have some cash.
And you must never believe that these are anything but pieces of paper that can go poof. They are not bricks and mortar or steel or copper. They are just ephemeral pieces of paper. When you know that, you will always have a level of caution that can be justified.
Do I think the market could crash again?
How's this for an answer: I didn't think it could crash the last time! And as for Karen Cramer? She's mum. You only need to be one-for-one in the crash game.
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At time of publication, Cramer was long Goldman Sachs.
Jim Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO.
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