One of the best ways to make sure the easy gains of the past 10 years haven’t made you complacent is to look back at the Crash of 1929.
Ninety years ago this week, the worst stock-market crash in U.S. history began. Almost everything today’s investors think about that pivotal event is wrong—and anyone who believes it’s irrelevant is wrong about that, too.
Everybody “knows” the market collapsed in 1929 because euphoric speculators bingeing on borrowed money drove stocks to absurd heights. That isn’t true.
Didn’t leading forecasters warn that a crash was coming? Not exactly.
Did anyone predict how long it would last and how bad it would get? Not even close.
Doesn’t the 1929 crash prove that if you hold stocks long enough, you’re bound to come out ahead? Only if you have the patience of a tortoise and the emotions of a stone.
On Oct. 23, 1929, the Dow Jones Industrial Average fell 6.3%. Then, with losses of 12.8% and 11.7% on Oct. 28 and 29—“Black Monday” and “Black Tuesday”—stocks crumpled as if they’d been felled by strokes of doom. (To get the idea, picture the Dow diving more than 6,100 points next Monday and Tuesday, or by nearly a quarter.)
The Dow peaked at 381.17 on Sept. 3, 1929. It finally hit bedrock at 41.22 on July 8, 1932, down 89.2%. In less than 35 months, a dollar invested in stocks shriveled into barely more than a dime.
What caused the collapse? To be sure, some stocks were expensive. According to Barrie Wigmore’s 1985 book “The Crash and Its Aftermath,” National City Bank of New York peaked at 120 times earnings and 13 times book value, a measure of its net worth. (Those multiples are based on a reconstruction by Mr. Wigmore.) This week,
—the direct descendant of National City Bank—traded at 9.6 times its last 12 months’ earnings and 0.9 times book value, according to FactSet.
SHARE YOUR THOUGHTS
How prepared do you think you are to survive a future market crash? Join the conversation below.
And some investors believed fund managers had magical powers. The Magazine of Wall Street argued on Sept. 21, 1929, that it was “reasonable” to pay 150% to 200% more than a fund’s net asset value “if the past record of management indicates that it can average 20 percent or more.”
But most stocks weren’t that overheated. Many major companies traded at 14 to 19 times earnings around the market’s peak in September 1929. Profits were growing far faster than stock prices. Industrial stocks began 1929 priced at about 15 times earnings; by September, they traded at slightly above 13 times, the economist Irving Fisher pointed out in his 1930 book “The Stock Market Crash—and After.”
The hottest stock of 1929, Radio Corp. of America, peaked at 73 times earnings and more than 16 times book value, according to Mr. Wigmore’s reconstruction. How does that compare to today’s technology darlings?
traded earlier this week at 73 times earnings and more than 16 times book value, according to FactSet.