KEY POINTS:
For thousands of New Zealanders, next week will mark the anniversary of their loss of faith in the sharemarket.
Twenty years ago this month world sharemarkets began plunging into what became the worst financial crisis the investing public had seen since 1929.
On October 19 Wall St markets
began their dramatic plunge. The panic spread to New Zealand the following day - October 20, now dubbed Black Tuesday. Nowhere did the crash hit harder than New Zealand.
By late 1988 business commentators in Australia, the US and UK were describing the crash as a "correction" - their markets had recovered.
But in 1991 New Zealand's bourse was worth just $14 billion, down from $45.5 billion before the crash.
Macquarie New Zealand investment director Arthur Lim, then a youthful risk management adviser for Citibank, says people are still telling him they would never invest in shares because of what happened in 1987.
"New Zealand is the only country in the world where people still say that. Everyone else has moved on. In the US people invest and see themselves as relating to the economic environment.
"You buy Apple products and invest in Apple shares. In New Zealand people see their shares as being owned by a few individuals and don't recognise that it's participating in the country's economy. We need to exorcise the ghost."
A broker, who did not want to be named, said the events of 1987 and its fallout were "a dark distant memory.
"I'm surprised people still talk about it, it's like we can't let go. And that's sad because the market post the crash would have done most people well."
Indeed, the market has matured. Dividends and share buybacks have been a characteristic of NZX companies over the past few years, Lim says.
Still, shareholder numbers speak for themselves. Back then, big guns such as Brierley Investments had about 100,000 shareholders. Today Telecom claims the biggest investor base with 40,000.
People are happier investing in something they can touch, like houses, over a piece of paper.
The crash had a huge negative impact on New Zealand, says former broker and Herald columnist Brian Gaynor, in particular the "ordinary guy in the street".
"Everyone was talking about the market. Once, when I was coming back from Sydney the passport guy at the airport asked me what shares he should buy."
Executive director of Guinness Peat Group, Tony Gibbs, remembers that share clubs were all the rage for the ordinary punter.
"There were possibly thousands around the country, with little analytical work being undertaken."
Since 1984 the stock index had, mostly, been rising and share ownership in New Zealand was at its peak.
It was a time "when champagne met the masses", remembers broker Brett Wilkinson. "We were all rather unsophisticated investors and when the crash came it got people from all walks of life."
Now a co-director in his own brokerage, in 1987 Wilkinson was a young executive with investment firm Rainbow Corp.
"In those days everybody was geared up, it was like whoever had the most debt was the hero. Personal guarantees were all the go and would come back to haunt us.
"The listed companies [were] geared up, companies reported profits largely based on dubious valuations. It was one giant pyramid game. I remember going to lunch at [Auckland hotel] the Regent 13 days out of 15, it was like our cafeteria."
More people lost money after the crash than the days during it, as many investors, encouraged by the plummeting share prices, grabbed what they believed were bargains.
Months later they lost all their money as those companies, revealed to be geared to the teeth and unable to repay debts, went bust.
The effects of the crash were felt in New Zealand long after it happened, says ASB Securities adviser Stephen Wright.
"Because interest rates stayed high our economy went south and, after an initial surge in the early 1990s, property went south too. [Market] turnover collapsed completely to less than $10 million a day."
However the market has matured, says Lim, and a crash of that scale is unlikely to happen again.
"Back then New Zealand had just deregulated its markets after years of protection in the bosom of the state. The country grew up very fast, it was a horrendous process, and investors paid the price."
It's generally agreed that a major factor in the crash was the trading technology used by large US broking houses: many shares were bought and sold via programme trading where, if the price of a stock fell below a certain price, a programmed computer automatically sold that stock. Now safety valves are in place to counter anything like that, says Goldman Sachs JBWere's Peter Stokes, a young floor operator with broker Francis Ellison Symes at the time.
Quality analysis and research was not available in those days, says Stokes, meaning share prices and company valuations were driven by buy- and sell-orders instead of actual information.
"This was the trigger that brought down the likes of Chase Corp and Equiticorp, because there was so much intercompany investment that prices were inflated on the back of other inflated valuations."
"A lot of people were buying and selling shortly afterward with the view of never settling and just taking the profit, and they got away with it."
There are some similarities in market conditions now as were then, says ASB's Wright. Global liquidity is high, the New Zealand economy is strong, the market is "booming" despite having the highest real interest rates in the world.
However unemployment and inflation rates are low, and interest rates are less than half of what they were then. And world markets were able to sustain the fallout from the tech wreck of 2000-01 and the 1997-8 Asian crisis.
However, a greater complexity of financial instruments in the modern market had added new risk, warns GPG's Gibbs.
"If you've got a series of sophisticated financial instruments which only a few people understand and you've got a lot of people playing with them then I think you've got the potential for another serious correction."
On the other hand there are also a lot of smart people that are aware of the risks and probably know how to deal with them, he adds.
Countdown to meltdown
October 14 US benchmark, the Dow Jones Industrial Average, drops a record 95.46 points to 2412.70
October 16 The Standard & Poor's 500 drops 9 per cent for the week, one of the largest one-week declines in the past two decades.
The Dow Jones Industrial Average closes down 108.35 points. US Treasury Secretary James Baker voices concern about stock prices, although he states that they have dropped "from a very high level".
October 19 The Dow Jones falls 508.32 or 22.9 per cent, closing at an all-time low of 1738.40 points. Chaos reigns on the trading floor as many specialists simply give up, flooded with orders. Volume hits 604.3 million shares, almost twice the prior record of 338.5 million set on October 16.
October 20 A number of stocks halt trading on the NYSE. The New Zealand Stock Exchange falls 4.3 per cent. Australia's all ordinaries index falls 3.74 per cent, the Nikkei plunges 15 per cent and the FTSE loses 10 per cent.
