The Great Depression
What was The Great Depression
The Great Depression was a major worldwide economic depression that took place during the 1930s, beginning in the United States in 1929 after the stock market crash of October 29, 1929 (Black Tuesday). As a comparison, worldwide GPD fell in the 1930s by an estimated 15% while during the 2008 Great Recession it fell only by less than 1%. I think that knowing the sentiments, strategies, and stories of pitfalls from the times of the Great Depression can prepare us for the worst or at least be a fun mental entertainment.
The Great Depression: A Diary by Benjamin Roth is a set of entries that describe events, sentiments, and reflections of the author at the time of writing. Entries span from 1930 to the USA declaration of war in 1941. They don't directly explain the causes of the great depression.
As Wikipedia states, there are many theories behind the Great Depression. However, there is a consensus that the Federal Reserve System could have minimized the effect. They should have cut short the process of monetary deflation and banking collapse, by expanding the money supply and acting as lender of last resort. If they had done this, the economic downturn would have been far less severe and much shorter.
We can compare this to contemporary times. We've seen a lot of memes of federal bank printing money. Maybe the authors and the audience of such memes would not be so cynical if they could see the future without the actions of federal banks. I am not writing to defend FED, because I do not have sufficient knowledge, but after reading this book I'm way further from criticizing modern monetary policies.
Key takeaways from the book
Do not invest on margin
Roth many times repeated that the biggest mistake of investors was buying stocks on margin in the 1929 boom. It not only left investors without stock but also often created a liability that had to be paid.
A stock broker after 40 years experience said to me today: “The only people I know who ever made money in the stock market are those who bought for cash and owned the stocks outright. I do not recall a single margin trader who did not lose sooner or later.”
Buy value, do not speculate
I think this is the timeless rule. Reading Roth's diary you can think that it was influenced by The Intelligent Investor by Benjamin Graham, but that's not true (only because Intelligent Investor was written 10 years later). But the universal truth is the same. You should invest only in stocks that you think have intrinsic value. Do not speculate.
If he invests in stocks or bonds he will not follow blind tips or rush into a seething market with thousands of suckers—but in the quiet of his office he will carefully examine the earnings records of the company, its future prospects. He will seek advice if necessary and then buy only if he thinks the price is fair and the prospects good. He will hold on for several years and share in the growth of the company and will sell only if the company loses ground or if a stock-crazy public offers him much more for his stock than its intrinsic value.
You cannot time the dip
Roth few times makes a statement that a perfect investor would buy the dip or sell near before the market crash. This is not that easy as he primally thought. Later he reflects on the impossibility of timing the market. A wellknown rule is that time in the market is better than timing the market.
When stocks reached their all-time low in July of 1932 (when Sheet & Tube sold at 6; Republic 1 1/2; Truscon 2; U.S. Steel 20, etc.) it would have taken plenty of courage to buy because receiverships and bankruptcies threatened the largest companies and most of the banks in the country were closed or refusing to permit withdrawals.
How would he know the bottom was reached in 1932? He would not know. Most people did not realize the depression was over until a year or more after the turn had been made. If the fellow had waited until 1933-34 when prices were shooting up he could still have bought at bargain prices. In 1932 with stock prices at 10% of normal he could not have gone far wrong in buying stocks with 20 or 30 years earnings record and with a good chance to survive the depression.
The most important is liquidity
That was the main idea behind my actions in March 2020 while the stock market crashed after Oil War and Covid-19 pandemics. I knew that the big investors like Warren Buffet or Charles Munger also had cash on hand. Sadly I had not invested in the 2020 dip as I thought it would be longer (actually this short-lived bear market lasted only a month [wikipedia]). Having cash on hand Warren Buffet has gained big profits during the 2008 Great Recession as he bought many undervalued stocks.
Fools rush in to buy when the market is booming—the wise investor buys on darker days when he knows stocks are selling below value—and then holds on—confident that he cannot lose his principal and that sooner or later the market will come back and raise prices above their intrinsic value. To do this an investor must have liquid capital, courage and above all patience and ability to hold on and wait.
Do not invest too soon
That's probably why I haven't invested in the 2020 bear market. You can imagine what could happen if you invested too soon, e.g. in 1930 thinking that stocks cannot go lower. You would be in big trouble as your capital would be fractioned and frozen for almost a decade.
Immediately after the 1929 crash the speculators rushed in to buy “bargains” but were badly mistaken because the market kept going down and down even tho industrial leaders kept on assuring the people that everything was fine and the worst was over. At the present time, the newspapers are urging people to buy these “bargains” but opinion is much divided as to whether or not the bottom has been reached.
It seems there should be no rush to buy bargains in a panic. The opportunities are many and the period is often protracted. The best time to buy of course is when the panic is almost over.
Have some bonds in your portfolio
This is also the idea you can find in the Intelligent Investor. Certainly, Benjamin Graham was inspired by events of the Great Depression. I am not so sure about this principle. Are the bonds so important as a safeguard if you invest only in solid stocks?
The European investor takes his capital—no matter how small—half he invests in government bonds—25% in high-grade dividend paying stocks—and the remaining 25% he will use to gamble on speculative stocks offering possibility of large gains. In the long run he comes out best. His possibility of loss is limited and in an abnormally low market like in 1932 he has capital for unusual bargains. What the American needs is not only stock exchange regulations but also an education on the investment possibilities of the stock market.
The only conclusion I can come to is that at least half of the investor’s money should be in good bonds.
The only moral I can see is to limit investments to the highest grade issues and to diversify. If he had invested in a diversified list of blue chip stocks and bonds he would still be a loser but not nearly so much and he would still be getting a comfortable income.
Real estate was not safe and sound
You should always remember that real estate is not the ultimate investing mean. People still had to pay their mortgages in times of depression. What was scarier is the fact that there was deflation. Deflation is the worst scenario for the debtors. Aside from mortages, there are other costs, like taxes, maintenance costs, etc.
This is another example why a professional man should not invest in low-grade real estate. It takes almost full time to collect the rent, make the repairs, etc. The overhead is high and he is fortunate if he makes 6% clear over a period of years with nothing for his labor. Properties of this kind seldom have a speculative value.
Low supply of money is a disaster
For me, that's the most insightful takeaway from the book. Banks were almost always closed and you couldn't withdraw money deposited before 1929. A low supply of money causes even more hoarding.
There is no money in circulation and all business is at a standstill.
It is hard to rent a safety box today because there has been such a demand by hoarders. Actually the liquid cash of the bank is being transferred from the bank vaults to the private safety vaults where it is taken out of circulation and becomes sterilized.
I was amazed that Roth was more concerned about inflation than deflation, even if he had no savings at the time. I understand that the perspective of hyperinflation similar to one in the Weimar Republic probably was much worse in his mind than The Great Depression.
Inflation is a terrible thing and I hope it will never come to America. It penalizes saving and changes the entire outlook of the prudent investor from government bonds, life insurance, etc. to speculative stocks and commodities.
During inflation American speculators went into Germany and bought huge pieces of valuable real estate for sums as low as $50 in our money. Hunger, starvation, and ruin were the results of German inflation.