Business, Investing, Making Money

What Share & Forex Investors Can Learn From The Stock Market Crash of 1929


What Share & Forex Investors Can Learn From The Stock Market Crash of 1929:

It’s only fair to emphasize that on the worst day the Stock Exchange ever saw, it was still just a marketplace, an arena where buyer and seller could transact their business.

The brokerage community, composed as it was of professionals, might have been expected to cast a sterner, more skeptical eye on the weakening economic conditions so falsely reflected in the market’s soaring prices, but there were few enough, in truth, who smelled danger in the spring air of 1929. Euphoria was endemic. The Exchange was no giddier than its customers.

It is worth recalling briefly some of the events of those turbulent days, for in violent and exaggerated form the Crash spelled out the consequences of ignoring the basic principles of sensible investment. This is not to say that only foolish people lost money in 1929, or even that wise ones could have read all the signs correctly at a time when the mirage of endless prosperity had consumed much of the nation. Nor should that long-ago nightmare stop us from making investments today.

The crash, as every economist and social historian who sifted the ashes was quick to tell us, was a classic case of the wish transcending reality. First, of course, came the Boom. After a few unsettled years following World War I, the nation had straightened out economically and entered a period of joyful prosperity.

The automobile industry, producer of the new era’s most glittering symbol, was thriving. This was good news for the vast network of sub-contractors and suppliers of rubber, glass, and steel, of batteries, spark plugs, brake linings, and gasoline. Construction of office buildings, homes, and highways was increasing, and this fattened the producers of lumber, cement, electrical fixtures, and home appliances. Everywhere more power was needed.

The icebox was giving way to the electric refrigerator, the washtub to the washing machine. And more and more homes had backyard aerials enabling them to tune in on the wonderful world of radio. The utilities grew, merged, pyramided into enormous holding companies. The movies were springing into full bloom. Everywhere there was money and progress.

The stock market responded vigorously.

Beginning in 1924, prices moved steadily upward. Each year was better than the last. An impressive array of important people was being quoted to the effect that it now seemed clear the American people had found the secret of capitalistic perpetual motion. The words varied but the message was the same: a wise Providence had seen fit to endow us bountifully with this world’s goods. All that was required to achieve an endless prosperity was to have faith in America and keep moving. We were on the glory road.

Looking back, considering the bankers, tycoons, government executives, and assorted wizards who spoke and the rest of us who listened, eager to believe it all seems preposterous and naive. But in the 1920’s it was hard to be pessimistic, hard even to be realistic. For America, it was a time to grow rich, and in the end appeared to be never.

Actually, as we now know, the signs and portents of trouble ahead showed themselves early and were there for all to see. In 1927 it was well-known that speculation in securities was increasing. Loans to brokers and dealers inched upward, reaching a total of $3.7 billion, a sure indication that too much trading was being conducted on margin.

Margin buying was then and still is common practice. The customer pays only part of the purchase price of his securities and borrows the balance from his broker, using the stock he buys as collateral for the loan. In a rising market, a buyer might put up $2,500 to buy 100 shares at 50, wait for a ten-point profit, sell, pay off his loan, and be $1,000 ahead twice the profit he would have made buying outright only the 50 shares his original $2,500 would command. Trouble looms, however, if the stock should drop to the point where its value threatens to be insufficient to cover the loan.

Then the broker calls for more margin funds to reduce the loan to a level equivalent to the new, lower value of the stock or, if the customer is unable to meet the call, sells him out.

When does the total of brokers’ loans money loaned to them to loan to their customers get too high? The Twenties did not know, but they were not frightened. President Coolidge did not think them too high. Treasury Secretary Mellon didn’t, either. And as long as the market soared upward, as though inflated with helium, they were right.

Apparently, few paused to ponder the consequences of a general market drop and what it might do to the shoestring speculators.

People’s eyes were indeed lifted to the stars, for little attention was paid to events underfoot. By early 1928, business was exhibiting symptoms of distress. Overproduction and overexpansion were accompanied by serious unemployment. And the market reacted. Time and again, there were short but severe jolts indicating that all was not well, that the great bull market was not impervious, that what went up had a very good chance of coming down.

Still, it was also true that the market rebounded with astonishing vigor after these shocks. Following the election of President Hoover, the upward march resumed. The keener analysts were now stating firmly and unequivocally that the market level was dangerously high, but their warnings were lost in the anvil chorus of optimism that still pervaded Wall Street and its swelling army of customers. Playing the market was now everyone’s game.

The end of 1928 and the early months of 1929 brought further tremors, but once more the market rallied, and by midsummer stocks had climbed to undreamed-of peaks, and fears receded. Broker loans were over the $6 billion mark and, according to one post-mortem analysis, some 300 million shares of stock probably were being held on margin.

But why worry? Values were so astronomical, as September came, that there seemed no reason they should not go higher. Faulty logic? Of course. Yet who can blame the man who bought Montgomery Ward at 150 and saw it go to 450 in a year and a half for feeling that another 50 points was in prospect?

It is unfortunate that prices did not keep rising. Knowing when to sell is always difficult and in the months running up to the crash it would have been very difficult to tell that a crash was just around the corner.

We now have the experiences of the past that we can draw from to try to help us avoid trading/investment mistakes in the future.

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Risk disclosure: *All investments involve risk. Before making any financial or investment decisions, we highly advise that you seek the advice of a properly licensed and trained investment professional.

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