Cambiar Investors was incepted in 1973 amidst one of the worst bear markets seen since the Great Depression. Originally planned to be named Barish Investments in honor of its founder, Michael Barish, the resemblance to the term “bear” was considered too similar, particularly due to the market conditions during that period. Instead, Mike opted for the name Cambiar, derived from the Spanish word “to change”, symbolizing the perpetual evolution of the markets. Rather than attempting to predict such occurrences, the focus lies in the ability to adeptly respond to and adjust to them. The 1973-1974 bear market was a poignant reminder of this. The Dow Jones reached its pinnacle in 1973 at a staggering 1052 points. However, come mid-1974, the Dow lost almost half its value, dwindling to 578 points.
In the early 1970s, the Bretton Woods monetary system, which had anchored global currency values, began to unravel. This unraveling was exacerbated by America’s decision to abandon the gold standard, leading to volatility in currency markets and shaking investor confidence. The bear market’s intensity was amplified by the 1973 oil crisis, initiated by OPEC’s oil embargo in response to geopolitical tensions. The resulting skyrocketing oil prices led to stagflation – simultaneous high inflation and high unemployment – creating a perplexing economic environment. Escalating inflation eroded purchasing power, while high unemployment strained consumer confidence and business investment. The resignation of President Richard Nixon in August 1974 amidst the Watergate scandal further rattled the foundations of stability. The political turmoil and subsequent loss of confidence in the U.S. government’s ability to manage economic affairs cast a cloud of uncertainty over financial markets. The Watergate hearings and potential impeachment added to the problems known as “The Three I’s” – inflation, interest rates, and impeachment.
The stock market bore the brunt of these economic challenges with steep sell-offs, panicky investor sentiment, and extreme market volatility. As the bear market unfolded, investors grappled with the difficult decision of whether to hold or sell their investments. Some investors remained hopeful for a swift recovery, while others fled the market in fear.
While the market eventually found its footing, the road to recovery was neither swift nor painless. It took nearly a decade for the U.S. stock market to recover its previous value. Although this seemed like an incredibly challenging time to start an investment firm, Cambiar succeeded with a simple strategy of identifying resilient, high-quality companies that are capable of withstanding market volatility. This market downturn set the stage for a disciplined approach that has remained throughout the firm’s history.
The 1980s were a transformative decade in many aspects, from culture and technology to politics and finance. Lasting nearly a decade, the bull market of 1982-1987 was a period of economic expansion marked by the power of pro-growth policies, the significance of innovation, and the importance of a long-term investment perspective.
To appreciate the significance of the 1980s bull market, we must first understand the economic backdrop against which it unfolded. The late 1970s were characterized by stagflation—a toxic combination of stagnant economic growth and rising inflation. The Federal Reserve, under Chairman Paul Volcker, took drastic measures to combat inflation, raising interest rates to historic levels. This move had a profound impact on the economy, but it was a necessary step towards taming runaway inflation.
The turning point for the stock market came with the election of Ronald Reagan as President of the United States in 1980. Reagan’s administration introduced pro-business policies, such as tax cuts, deregulation, and reduced government spending. Investors responded enthusiastically to Reagan’s economic vision, and the stock market began its climb. The Dow Jones Industrial Average, which had languished below 1,000 for several years, started to ascend.
The 1980s also witnessed the birth of the personal computer industry, led by companies like Apple and Microsoft. These tech pioneers were at the forefront of innovation, and their meteoric rise contributed significantly to the bull market. Investors recognized the potential of this emerging sector, pouring money into technology stocks.
During this growth period, Cambiar focused on building a diversified portfolio of stocks that would deliver throughout market cycles. Although there were many exciting innovations, the goal was to be able to adapt and withstand volatile times in the market. This was exemplified during Black Monday, the day that ended this bull market run.
Black Monday refers to October 19, 1987, a day that saw one of the most severe stock market crashes in history. Within a span of just one day, the DJIA plummeted by 22.6%, solidifying its place as the largest single-day decline to this day. It was a day of turmoil and panic as stock markets around the world plummeted, sending shockwaves through the financial landscape.
The cause of this massive crash cannot be attributed to one specific factor or event. Rather, several factors contributed to the sudden and dramatic crash. One key component was the rapid growth of computerized trading and program trading strategies, which relied on complex algorithms to execute trades automatically. These automated techniques increased the impact of selloffs, which increased market volatility. Another contributing element was the excessive speculation and overvaluation of stocks in the preceding months. The market had been experiencing a period of rapid expansion, fueled by a sense of overconfidence, and sparking concerns of an asset bubble. When worries about the sustainability of this bubble surfaced, panic selling erupted. Additionally, portfolio insurance, a growing phenomenon at the time, amplified the decline. Portfolio insurance is hedging a portfolio of stocks against market risk by short selling stock index futures, which limits potential losses in stock price declines, without having to sell those stocks. As computer programs began liquidating stocks when certain loss targets were hit, prices fell. Consequently, a chain reaction ensued, with declining markets triggering additional stop-loss orders, while bid activity halted.
Fortunately, the stock markets were able to swiftly regain a significant portion of their Black Monday losses. Within two trading sessions, the DJIA rebounded by 288 points, accounting for a remarkable 57% recovery of the Black Monday decline. Governments and central banks around the world responded with interventions, including interest rate cuts and liquidity injections, to stabilize the markets. It prompted policymakers and market participants to re-evaluate risk management strategies and implement circuit breakers to temporarily halt trading during extreme volatility. Within two years following the crash, the U.S. stock markets had exceeded their pre-crash levels.
The fear and panic that gripped investors on Black Monday demonstrated how emotions can quickly drive market movements as much as economic fundamentals. The saying “it’s not about timing the market, but about time in the market” encapsulates the idea that you cannot consistently predict how or when the market will change. Cambiar’s disciplined approach to investing ensures that even in times of uncertainty, Cambiar can weather the storm by responding appropriately to volatile moments that inevitably arise in the market over time.
ASIAN FINANCIAL CRISIS
Bernhardt , D., & Eckblad, M. (2013). Stock market crash of 1987. Retrieved from https://www.federalreservehistory.org/essays/stock-market-crash-of-1987
Hayes, A. (2021). Black Monday: Definition in stocks, what caused it, and losses. Retrieved from https://www.investopedia.com/terms/b/blackmonday.asp
Certain information contained in this communication constitutes “forward-looking statements”, which are based on Cambiar’s beliefs, as well as certain assumptions concerning future events, using information currently available to Cambiar. Due to market risk and uncertainties, actual events, results or performance may differ materially from that reflected or contemplated in such forward-looking statements. The information provided is not intended to be, and should not be construed as, investment, legal or tax advice. Nothing contained herein should be construed as a recommendation or endorsement to buy or sell any security, investment or portfolio allocation. Securities highlighted or discussed have been selected to illustrate Cambiar’s investment approach and/or market outlook and are not intended to represent the performance or be an indicator for how the accounts have performed or may perform in the future. The portfolios are actively managed and securities discussed may or may not be held in client portfolios at any given time.
Any characteristics included are for illustrative purposes and accordingly, no assumptions or comparisons should be made based upon these ratios. Statistics/charts may be based upon third-party sources that are deemed to be reliable; however, Cambiar does not guarantee its accuracy or completeness. Past performance is no indication of future results. All material is provided for informational purposes only, and there is no guarantee that the opinions expressed herein will be valid beyond the date of this communication.