The Great Stock Market Crash of 1929 was a wrenching event for investors, touching off a severe bear market that eventually sent stock prices plummeting by 89% over nearly 3 years. That crash took place in late October of 1929, and its 90th anniversary is a time to review five key lessons for investors today, as they try to prepare for the next big meltdown, according to adetailed analysis in acolumn in The WallStreet Journal by Jason Zweig, as outlined below.
These five takeaways are: (1) "buy and hold" long term investing does not guarantee gains, (2) paying huge premiums for growth can be risky, (3) the next crash may come unexpectedly, (4) a crash may come even if corporate profits are rising, and (5) reaching the bottom may take much longer than most experts think.
Key Takeaways
- The Stock Market Crash of 1929 has 5 key lessons for today.
- Buy and hold investing does not guarantee long term gains.
- Paying heavily for growth can be risky.
- A crash may come when it is completely unexpected.
- A crash may occur despite rising corporate profits.
- It may take years for stocks finally to hit bottom.
Significance for Investors
The 5 lessons are explored in more depth below.
1. Buy and hold investing is not a sure bet. Even over the course of decades, it may be a losing strategy. The Dow Jones Industrial Average (DJIA) was the most-watched stock market barometer for many years both prior to and after the 1929 crash. From its peak in Sept. 1929 to its trough in July 1932, the Dow plunged by 89%. It took just over 25 years, to Nov. 1954, for the Dow to regain its Sept. 1929 peak.
However, buy and hold investors would have been receiving dividends in the interim, so they theoretically could have recouped their losses on a total return basis some years earlier. Nonetheless, still stung by the crash, only 7% of middle class households in 1954 told a Federal Reserve survey that they preferred to invest in stocks rather than savings bonds, bank accounts, or real estate.
2. Paying big premiums for growth is risky. While the shares of many major companies had P/E ratios of about 14 to 19 times earnings at the 1929 market peak, some of the premier growth companies were much more expensive. For example, Radio Corporation of America (RCA), a high-flying tech stock in today's parlance, peaked at 73 times earnings and more than 16 times book value, valuations similar to that of Amazon.com Inc. (AMZN) today.
Additionally, in 1929 some investors were willing to pay huge fees to entrust their money to star investment managers. In this vein, a publication called The Magazine of Wall Street claimed that it was “reasonable” to pay between 150% and 200% more than a fund’s net asset value “if the past record of management indicates that it can average 20 percent or more.”
3. Crashes are often unforeseen. Few, if any, leading market watchers in 1929 anticipated a crash. An exception was economic forecaster Roger Babson, but he had been telling investors to dump stocks since 1926. In the interim, the Dow rose by about 150% to its 1929 peak.
4. A crash may come while profits are rising. In 1929, corporate profits were growing much faster than stock prices and, as noted above, the shares of many leading companies traded at reasonable valuations by historic standards. In 2019, however, many companies are reporting profit declines.
5. A crash may take years to bottom out. The Dow lost a cumulative 23% on Oct. 28 and Oct. 29, 1929, dates known as "Black Monday" and "Black Tuesday." Following fierce selloffs during the previous week, by this point the Dow was down by almost 40% from its high on Sept. 3, 1929. The most eminent market watchers of the day thought that the worst was over, but, as noted above, the bear market would persist into July 1932, with yet larger declines ahead.
Roger Babson finally turned bullish in late 1930 and by May 1931 he was advising investors to load up heavily on stocks. The Dow would plunge by about 70% from that point to its eventual trough in July 1932.
Looking Ahead
An old adage in investing is that "trees don't grow to the sky." The next bear market is inevitable, but when it starts, how long it lasts, and how deeply it plunges are all unknowns. Another inevitability is that pundits who predicted a crash will claim prescience, even if their timing was off by years. Roger Babson was an early pioneer in this regard.
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FAQs
These five takeaways are: (1) "buy and hold" long term investing does not guarantee gains, (2) paying huge premiums for growth can be risky, (3) the next crash may come unexpectedly, (4) a crash may come even if corporate profits are rising, and (5) reaching the bottom may take much longer than most experts think.
What were the lessons from the 1929 stock market crash? ›
From the stock market crash of 1929, economists – including the leaders of the Federal Reserve – learned at least two lessons. First, central banks – like the Federal Reserve – should be careful when acting in response to equity markets. Detecting and deflating financial bubbles is difficult.
What were the five 5 causes of the stock market crash of 1929? ›
What Were the Causes of the 1929 Stock Market Crash? There were many causes of the 1929 stock market crash, some of which included overinflated shares, growing bank loans, agricultural overproduction, panic selling, stocks purchased on margin, higher interest rates, and a negative media industry.
What was one of the most important factors of the 1929 stock market crash? ›
The main cause of the Wall Street crash of 1929 was the long period of speculation that preceded it, during which millions of people invested their savings or borrowed money to buy stocks, pushing prices to unsustainable levels.
What happened in 1929 that changed the world? ›
The major event of the year for the United States was the stock market crash on Wall Street, which was to have international effects and be widely regarded as the inciting incident of the Great Depression.
What were four major effects of the 1929 stock market crash? ›
By 1933 the value of stock on the New York Stock Exchange was less than a fifth of what it had been at its peak in 1929. Business houses closed their doors, factories shut down and banks failed. Farm income fell some 50 percent. By 1932 approximately one out of every four Americans was unemployed.
Did anyone benefit from the 1929 stock market crash? ›
Several individuals who bet against or “shorted” the market became rich or richer. Percy Rockefeller, William Danforth, and Joseph P. Kennedy made millions shorting stocks at this time. They saw opportunity in what most saw as misfortune.
What was the main result of the stock market crash of 1929? ›
Around $14 billion of stock value was lost, wiping out thousands of investors. The panic selling reached its peak with some stocks having no buyers at any price. The Dow lost an additional 30.57 points, or 11.73%, for a total drop of 68.90 points, or 23.05% in two days. On October 29, William C.
What are some important facts about the stock market crash of 1929? ›
Key facts about the great crash of 1929
On October 24, 1929, Black Thursday, stock prices immediately fell 11% upon markets opening. Traders were able to stabilize prices with excessive buying by the time markets closed. By the end of the trading day nearly 13 million shares had changed hands.
What ended the Great Depression? ›
Despite all the President's efforts and the courage of the American people, the Depression hung on until 1941, when America's involvement in the Second World War resulted in the drafting of young men into military service, and the creation of millions of jobs in defense and war industries.
Among the suggested causes of the Great Depression are: the stock market crash of 1929; the collapse of world trade due to the Smoot-Hawley Tariff; government policies; bank failures and panics; and the collapse of the money supply. In this video, Great Depression expert David Wheelock of the St.
What could have prevented the stock market crash of 1929? ›
How could the Stock Market Crash of 1929 been prevented? Had the Federal Reserve and other governing bodies established a separation of banks and investment firms, the stock market would likely not have become saturated, especially with borrowed money.
Why is October 29, 1929 known as Black Tuesday? ›
Black Tuesday was Oct. 29, 1929, and it was marked by a sharp fall in the stock market, with the Dow Jones Industrial Average (DJIA) especially hard hit in high trading volume. The DJIA fell 12%, one of the largest one-day drops in stock market history.
How does the Great Depression affect us today? ›
Psychologists and sociologists have noted that the effects of depression-era hardships can shape the behavior of people for the rest of their lives, impacting activities ranging from saving money to job preferences, food conservation, and even birth rates.
Why is 1929 important to history? ›
In 1929 the Congress session was held at Lahore in 1929. This session was very significant because in this Lahore session the prominent party Indian National Congress, took the resolution of Poorna Swaraj or complete independence.
Why is 1929 a turning point in history? ›
The 1929 stock market crash in New York was a turning point in US history. It marked the beginning of the Great Depression, a period of economic hardship that would last for many years.
How did the stock market crash contribute to the Great Depression? ›
The 1929 crash didn't cause the Great Depression outright, with only 10% of Americans invested in the market, but it lowered consumer spending, caused panic that worsened an ongoing recession, reduced corporations' assets and hurt their future prospects, and contributed to a banking crisis.
How did people first react to the stock market crash? ›
As the financial markets collapsed, hurting the banks that had gambled with their holdings, people began to fear that the money they had in the bank would be lost. This began bank runs across the country, a period of still more panic, where people pulled their money out of banks to keep it hidden at home.
How did Hoover try to help the economy after the stock market crash? ›
action." Since the crash, Hoover had worked ceaselessly trying to fix the economy. He founded government agencies, encouraged labor harmony, supported local aid for public works, fostered cooperation between government and business in order to stabilize prices, and struggled to balance the budget.
What is a brief history of the 1929 stock market crash? ›
On October 29, 1929, "Black Tuesday" hit Wall Street as investors traded some 16 million shares on the New York Stock Exchange in a single day. Around $14 billion of stock value was lost, wiping out thousands of investors. The panic selling reached its peak with some stocks having no buyers at any price.
