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Putting the Buy-and-Hold Gospel to the Ultimate Test


Putting the Buy-and-Hold Gospel to the Ultimate Test

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.


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? Inc.

traded earlier this week at 73 times earnings and more than 16 times book value, according to FactSet.

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To this day, no one is sure why stocks crashed in 1929. The collapse of a British investment firm? Unlikely. A flood of newly issued stock? Probably not big enough. Speculators on a debt-fueled buying spree? Lending standards on borrowings to buy stock were stricter in 1929 than in earlier years.

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The likeliest culprit is tight monetary policy by the Federal Reserve. But why stocks collapsed in late October 1929 when rates had been rising since 1927 nobody can say.

The economic forecaster Roger Babson did predict the crash, but he was more lucky than right.

“Sooner or later a crash is coming which will…cause a decline of from 60 to 80 points in the Dow-Jones,” Mr. Babson said in September 1929, although he had also urged clients to get out of the market in 1926 and predicted crashes in 1927 and 1928.

Mr. Babson turned bullish in late 1930 and, by May 1931, said investors should go all-in on stocks. The Dow went on to lose roughly 70% more.

A Wall Street Journal article from Oct. 26, 1929. The true bottom of the market would come nearly three years later.

Mr. Babson wasn’t alone. No one foresaw how long and terrible the bear market would be.

“Stock Market Sanity Returns,” declared a headline in The Wall Street Journal on Oct. 26, 1929: “Hysteria Departs as Financial Leaders Find the Situation Is Sound.” Two days later, the Journal reported, “Stock Market Passes Crisis: Banking Support Restores Order After Heavy Wave of Forced Selling.”

In a newsreel from Oct. 30, 1929, still available online, Mr. Fisher, the nation’s leading economist and a Yale professor, proclaimed: “It now looks as though the bottom of the market had been found.”

The market found the bottom, all right—84% lower and almost three years later.

“I look for an era of ten to twenty-five years of…good increases in sound common stocks,” wrote financial pundit J. George Frederick in his 1930 book on the crash, “Common Stocks and the Average Man.”

“Good increases” ended up taking a lot longer than that. The Dow didn’t surpass its 1929 high until Nov. 23, 1954, a quarter-century later. That doesn’t include reinvested dividends, but most investors surely took their dividends as cash in those days.

Not many investors even stuck around long enough to break even. A 1954 survey by the Federal Reserve found that only 7% of middle-class households said they preferred to invest in stocks over savings bonds, bank accounts or real estate.

No one who lived through the crash of 1929 would agree with the view, advanced in the late 1990s, that stocks become riskless if you hold them long enough.

Investors should always regard the stock market as sailors regard the sea—a means to an end, usually benign, but potentially lethal. Catastrophic losses are rare, but their risk never goes away.

To be a long-term investor in stocks, you have to be prepared to lose more money for longer than seems possible. Anyone who takes that risk lightly is likely to sell out, in the next crash, near the bottom.

Write to Jason Zweig at


How prepared do you think you are to survive a future market crash? Join the conversation below.

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