The Morning After

On October 19th, 1987, the stock market crashed. The Dow Jones Industrial Average plummeted more than 500 points, almost five times the previous record single-day drop (which occurred the previous week), and in percentage terms, almost twice the size of the Crash of 1929. This was part of, and in turn accelerated, a global collapse in equity markets. Autodesk's stock, which had hit a high of over 33 less than three weeks before, plunged to close below 13 on October 27th. This decline wiped out all the gains in the stock for the last year, and left almost everybody hired in the last year with above-market stock options.

In addition, dire predictions about the future, concern for the value of retirement plan investments, and business prospects in general contributed to a general climate of unease. I made the following remarks at a special company meeting on October 27th.

Remarks for the Stock Market Crash Meeting

by John Walker — October 27th, 1987

Welcome to the morning after.

It's hard to watch frenzy in the stock market, 500 point drops on the Dow Jones Industrials, Autodesk stock shedding almost 60% of its value in less than a month, and ponderous predictions of panic from pompous prognosticators without wondering, “what does this mean to me, and what effect will this have on our company”.

I'll try to explain what's going on as I see it, the steps we took months ago to prepare for this inevitable occurrence, and what we can expect to happen next. Then I'll be glad to field any questions you may have on any subjects except the three I never discuss: politics, religion, and text editors.

I'd like to read a quote from a memo I wrote on February 3rd of this year:

I'm beginning to get nervous, really nervous, about this stock market runup and the action in our stock.

I think we may be entering into the kind of wild speculative blowoff that ran technology stocks into multiples of a hundred times earnings in the 1960's.

And you know what happens on the morning after.

As I recall, I started worrying at about the point the stock passed 13 (correcting for the split) on the way up. As one who has seen the crash of '70 and the crash of '74, it was abundantly clear to me that we were in one of those rampaging bull markets in which common sense, fundamental values, and historical perspective are trampled in the wild rush to get rich quick.

This happens every decade or so, and every time it happens, there invariably comes a time when all the news is rosy, when business has never been better, and when every last person in the world who is inclined to buy has bought. Then the bottom drops out.

Why? Because prices rise when everybody wants to buy and they drop when everybody wants to sell. But when everybody has already bought, there aren't any buyers left. Then somebody looks around and notices that it's a long way down, and that those black clouds that everybody ignored last week are now casting cold shadows and beginning to drizzle.

Bull markets lead to bear markets lead to bull markets in a cycle as old as commerce and as inevitable as the changing of the seasons.

So what does the stock market crash mean to Autodesk? In terms of direct effects, essentially nothing. The market value of our company has been cut in half, but since the company has no plans to sell additional stock, that has no effect on our operation. Since Autodesk's stock has gone down about the same amount as other comparable companies, we're in the same relative position as we were before. A receding tide deposits all boats on the muddy bottom.

Autodesk's business is as good as it's ever been. Our sales are stronger than ever, we continue to be one of the most profitable companies in the world, and we're expanding our product line, our distribution channels, our presence in major accounts and government markets, and our international operations. None of this is affected in any way by gyrations in the financial markets. When the value of our stock doubled in the last year for no good reason, it didn't make our business grow any faster than we had predicted two years before. And when our stock falls by one half, there isn't any reason to think that will affect us either.

Now none of this is to minimise the impact of what is going on. When you hack a trillion dollars off the value of financial assets, it's bound to have some impact on business and the economy. And if we find ourselves in a deep recession, our sales may be hurt. But amid all the comparisons with 1929, let's remember that not every stock market crash leads to a recession. The stock market crash of 1929 was only part of the great depression, which devastated the economy primarily due to the collapse of the banking system, not the stock market. That type of collapse is much less likely to happen today. This may be more like the crash of 1962, where the stock market hit a speed bump and scared everybody to death, but there was almost no effect on the economy, which continued to roar ahead and eventually carried the stock market to record highs in 1966. We don't know what will happen this time, but we have carefully prepared for whatever the future may bring.

If you're inclined to worry about the future of Autodesk, keep this in mind. We have one hundred million dollars in cash. That cash is invested in risk-free short-term government securities whose value is not affected at all by the stock market and whose value could be at risk only if money became obsolete. One hundred million dollars. That's about five dollars per share of stock, and I sometimes wonder if some of the people who are dumping our stock at 13 know that there's a green five-spot behind every share. One hundred million dollars. That's about three hundred thousand dollars for every employee, so even if sales went to zero, we have a multi-year buffer to keep the company operating and progressing. Autodesk is one of the most financially strong companies around. We got that way by deliberately choosing a prudent and conservative path to growth, politely declining to play the financial games that got so many in trouble in the recent turbulence.

We have no debt at all. We do so much business overseas that when the dollar falls, it actually improves our sales and profits. If the United States goes into a downturn, we'll do plenty of business in the rest of the world while we wait for better times. We don't gamble the future of our company in the stock market or in other short term speculations. We're building this company to be a force in the market for twenty, fifty, a hundred years to come—and we're not going to crapshoot it for a quick buck.

But most of all, what we are doing is right. We are not just a good stock, we are a good business. We sell tools that individuals and companies use to make themselves more creative and productive. And productivity is more important than ever when the economy turns down.

A month ago, I wrote the copy for advertisement which I now wish we'd been running the last two weeks. It's only two sentences, and I'd like to read it to you now.

Everybody says America must increase its productivity or reduce its standard of living.

Autodesk sells products that increase the productivity of every manufacturer in America.

It's true, you know. And people who work hard, in companies that work well, who make and sell products that make a difference, that make people's jobs easier, their lives more productive, and enable them to do things they couldn't do before, do well regardless of the stock market, the economy, or the folly of politicians.

I have called this “The Golden Age of Engineering”. Part of that golden age is a resurgence in interest in truly productive endeavours, designing, building, and manufacturing, rather than corporate takeovers, leveraged buyouts, stock index futures, and “financial services”.

Not long ago half the pundits in the world were explaining how Americans could prosper by selling innovative financial products to one other while importing productive work from Europe and the Far East. Personally, I've always thought that was a lot of turbo. You know, turbo, that's a device that makes hot air and high pressure. Now, I think, people are awakening to the folly of this monumentally silly idea. And as they focus on productive work and tools for that work, they will continue to buy those tools from the world's leading supplier, Autodesk, and the company that we have built will continue to prosper.

All of this may seem small consolation if you own Autodesk stock and have watched its value plummet by one half, or if you have stock options whose exercise price is now well above the market price of the stock. For option holders, things are not as bad as they may seem. When I wind up in a minute or so I'm going to turn things over to Chris Record. He'll describe the Amazing Counter Parabolic New Options For Old Trade In Plan. Take note, it's very important.

If you're a stockholder, there's nothing for it but to come to terms with the fact that the stock isn't worth what it was two weeks ago. If you were looking at that stock as the down payment on a house, the kids' college fund, or some other economic goal, the adjustment can be tough to make. But it's important that we don't let regret paralyse us at a time when our efforts are vital to keeping the company growing and eventually restoring the value of the stock as investors come to their senses and realise that Autodesk is different from the many other companies they dumped in time of panic.

You've all heard me talk again and again about the fact that this is a high-technology, high-risk business and that great rewards flow from the assumption of large risks. For the last five years, and especially in the last year, we've all shared in those great rewards. Now we get to taste the risks. It's both gratifying and frustrating to have your stock dumped when you didn't do anything wrong. Most small companies get pummelled when they fail to get a product to market on time or they can't meet their sales forecasts. We do everything right, and still we get bashed. It's little comfort indeed to know that everybody else is getting clobbered also.

We may look back on this period as a time of trial from which much good flowed, a time which tempered the company for its next great surge of success. Good times are wonderful, but they can lead to a feeling of complacency which can sow the seeds of destruction for any company. As I've said repeatedly, Autodesk is just one small company in a dangerous, highly competitive world. If this gust of winter's chill makes us rededicate ourselves to making our products, our service, and our marketing and sales the very best in the world, then I continue to believe what I said at the annual meeting in 1986.

Autodesk has always competed like a hungry rat. We will continue. And we will prevail.