Bill Bernstein, bestselling author and financial theorist, considers having an understanding of the history of investing one of the key ingredients to being a successful investor. He mentions in his book “If You Can”
The new investor is usually disorientated and confused by market turbulence and the economic crisis’s that often cause it; this is because he or she does not realize that there’s nothing really new under the investment sun. A quote often misattributed to Mark Twain has it that “History doesn’t repeat itself, but it does rhyme.” This fits finance to a tee. If you don’t recognize the landscape, you will get lost.
Understanding market and economic history can help give us an appreciation for how the stock market works, the economic cycles that have persisted throughout history, and how people have experienced and reacted in these past environments.
With this being said, I wanted to share some thoughts on one of my favorite investing and economic history books: “The Great Depression: A Diary” by Benjamin Roth. I believe this book can teach us a lot about investing and personal finance in general.
The Great Depression is a fascinating subject to study. The utter collapse of the economy is breathtaking. In the first five years of the depression the economy shrank by 50%. By 1933 almost half of all the nations banks had collapsed and about 25% of the American workforce were unemployed. From its top in September 1929 to the bottom in July 1932 the Dow Jones dropped almost 90%. It took the Dow another 25 years until it climbed back up to its 1929 peak, which it finally did in 1954.
These numbers are all staggering, but what can sometimes be missed in numbers is what it was like for ordinary people living through these events. That’s why I find “The Great Depression: A Diary” such an enlightening and educational read. It gives us a firsthand account of what was actually happening and how that impacted people’s day to day lives.
Benjamin Roth was a lawyer in Youngstown, Ohio who started a diary in 1931 documenting the Great Depression and continued writing all the way up until the attack on Pearl Harbor in 1941. There was a lot that happened in that decade (to say the least) that Roth writes about: the stock market crash, the collapse of the economy, the enactment of the New Deal and all that came with it, the abandonment of the gold standard, and much more.
Here are some of my favorite takeaways from the book.
Investing is just as much psychological as it is numbers and analysis.
Markets tend to go in cycles between fear and greed. Understanding the psychology of the public at large, and more important, your own emotional makeup is vital.
FEBRUARY 7, 1933: “The psychology of 1928 is different from that of today. In 1928 people were excited about big profits on the stock market; they read literature about investments, lived high and talked about the “new era.” Today their outlook is gloomy, they think the depression will never end, the stock market is an abomination, real estate is no good, everybody is cynical.”
NOVEMBER 26, 1937: “The more I see of the recent stock market slump the more I am impressed with the fact that the American people look upon the stock market as a place to gamble and not invest. In times of rising market the average American becomes over-optimist…Then when a slump comes… he becomes unduly pessimistic and sells at a loss.”
These same cycles haven’t changed, because human nature hasn’t changed. We can look back as recently to the dot com era of the late 90’s and the housing bubble of the 2000’s to see similar scenarios. Booms and busts and greed and fear are a nature of the system.
There was seemingly no end to the Great Depression. There are numerous times throughout his diary where Roth writes that things were turning around, only to come back later to correct himself.
AUGUST 7, 1931: “We seems to have touched bottom in Youngstown and it hardly seems possible that things could get worse
MARCH 8, 1933: “This was a poor guess. Conditions in 1932 were much worse.
JANUARY 2nd, 1937: We can formally and officially announce that the depression of 1929 has ended.
JULY 19, 1939: You were wrong. A new depression started Sept 1937 and is still with us.
The movement of the stock market don’t always make sense.
SEPTEMBER 1, 1932: The month of August just ended has been the lowest point so far in the depression for all kinds of business and professional men. The heat has been severe and all kinds of activity are at a complete standstill. The stock market on the contrary tripled its value during August in one of the quickest climbs ever witnessed. I believe this also established a record. Nobody seems to know even yet why the stock market went up because business has gotten worse instead of better.
“Value” is subjective. Value investing, made popular by the likes of Benjamin Graham and Warren Buffett, has historically shown to be a profitable investment approach. The basic idea is to buy stocks that look “cheap.” The challenges with value investing is in trying to accurately define what “cheap” is and also from the fact that just because something is cheap today doesn’t mean it can’t get cheaper tomorrow.
MARCH 8, 1933: “People who bought “bargains” in stocks in 1931 now find they were too quick and these same stocks are now selling at ⅓ of their 1931 prices. If they hold on long enough the will come out alright but it is a soul-trying period of waiting.”
Predicting the future is hard. Everyone makes forecasts about the future. That isn’t the issue. The issue is in how much weight you put on those forecasts. A benefit to understanding market history is in understanding just how hard it is to forecast what the future will look like.
JANUARY 2, 1937: “During the past depression prominent bankers, business men, etc were all wrong in most of their predications. Use your own judgement and do your own thinking.”
JULY 19, 1939: “As I re-read some of the predictions made by outstanding economists in past few years, I must laugh. They were all wrong.”
NOVEMBER 8, 1940: “It becomes increasingly clear that nobody can predict the future behavior of the stock market. One day the results of the election upset it and the next day it booms because of some chance happening. 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
The New Deal had some strange programs. The New Deal was a massive experiment that has had long lasting effects. Many popular programs came out of the new deal (such as the Social Security Act). But there were some head scratching aspects to it as well.
August 21, 1933: “The U.S. Agricultural program begins with the slaughtering of millions of hogs so that pork production will be curtailed and prices go up. Also 20% of all cotton, wheat, etc. is being plowed under to prevent overproduction. The U.S. gov’t pays the farmer for his loss. I don’t see how the destruction of basic food supplies can bring back prosperity when so many people are hungry”
Roth’s timeless advice on investing:
“Patience to wait for the right moment- courage to buy or sell when that time arrives–and liquid capital–these are the 3 essentials as I see it now.”
It’s been over 80 years since Roth shared those thoughts, but history has proven him wise.
The Great Depression served as a learning experience. To tie this back with the message up top, I end with one of the more incredible themes that Roth touches on throughout his book:
SEPTEMBER 9, 1931: “Politics, economics, and international finance- the depression has been a postgraduate college course for me and from that standpoint at least has been a worthwhile experience.”
“JULY 13, 1932: As far as I am personally concerned this depression has been a “postgraduate” course for me in economics and public finance. It has caused me to read widely of economic subjects and for the first time I am following, intelligently and with intense interest, the doings of Congress and the coming national election. This interest in books and economic subjects has been followed by history and biography
If you are looking for a quick and entertaining read I highly recommend you do yourself a favor and pick up a copy of “The Great Depression: A Diary” by Benjamin Roth.