Somewhere along the line growing up, most of us have encountered the story behind "Black Tuesday" and "The Stock Market Crash of 1929." On October 28th of 1929, the Dow Jones Index dropped 12.82%. The next day, it dropped an additional 11.73%. Here is a small glimpse into the story behind the numbers:
On Tuesday, October 29, the flood of sales continued. Historians have called this "the most devastating day in the history of markets." A gloomy quiet pervaded the trading floor. The week before, traders ran across the floor in panic, trying to submit their orders before prices dropped further. That day, however, the stock exchange was as dour as a funeral parlor. A reporter from the New York Times described the somber scene: "Orderly crowds lined up before each post, talking in subdued tones, without any pushing." In that last week of October 1929, the stock market began a momentous decline that came to be known as "The Great Crash."
During that time, $30 billion in stock value (about the same amount of money the United States had spent in World War I) evaporated completely along with people's dreams of achieving permanent prosperity.
I have no intention to understate the misery caused by this fallout or to suggest that the market crash of 1929 "just wasn't that bad." But I would like to add some context to the traditional understanding of this terrible stock market decline so that it may help you make more informed decisions about your own portfolio strategy.
If you take a narrow look at the stock performance of these four companies through the narrow lens of only 1929, then yes, things were incredibly terrible:
1. In September 1929, AT&T traded at $304 per share. By November 1929, AT&T traded at $222 per share.
2. In September 1929, General Electric traded at $396 per share. By November 1929, General Electric traded at $201 per share.
3. In September 1929, Hershey traded at $128 per share. By November 1929, Hershey traded at $68 per share.
4. In September 1929, IBM traded at $241 per share. By November 1929, IBM traded at $129 per share.
These are the statistics that you often hear bandied about in the history books. They provide an accurate read of the misery generated in 1929. But there are two important things that a singular focus on the price declines in 1929 do not tell: first, they usually do not note the crazy overvaluation of the 1929 stock market preceding the crash (the Dow Jones Index components traded at 25-30x earnings, and most large financial institutions traded at over 400% of book value). And secondly, they do not provide the broader perspective by noting the difference between, say, the 1927 stock market and the 1929 stock market.
When studying the stock market crash of 1929, the focus is always on the price of securities right before the crash happened, and then the low point after the crash happened. To get a broader perspective, let's take a look at the prices in August 1927 (before the speculative bubble occurred) and compare them with the November 1929 prices after "The Great Crash."
1. In August 1927, AT&T traded at $169 per share. In November 1929, AT&T traded at $222 per share.
2. In August 1927, General Electric traded at $142 per share. In November 1929, General Electric traded at $201 per share.
3. In August 1928 (1927 figures were not available for Hershey), Hershey traded at $53 per share. In November 1929, Hershey traded at $68 per share.
4. In August 1927, IBM traded at $93 per share. In November 1929, IBM traded at $129 per share.
What is worth noting is the fact that the AT&T, General Electric, Hershey, and IBM investors actually made a tidy profit between their August 1927 purchases and the post-crash prices in November 1929. But no one ever talks about that because it does not fit the historical narrative. Also, it would have been difficult from an emotional perspective to experience the rapid declines in paper wealth during the 1929 crash (the kind of people who would have thought "those businesses should not have been trading at such crazy high valuations" were probably not the types of folks that owned those securities during the crash).
When people want to sell you on the idea that the stock market is "rigged" or that long-term investing is a naïve pursuit, they will usually tell you that the stock market took about 25 years to recover from the Dow's pre-crash high of "300" to the next time the Dow Jones hit "300" in 1954. First of all, that view of investing completely ignores the effects of dividends (which ranged from a little under 3% annually to a little over 10% annually during the 1929 to 1954 period) which contributed significantly to total returns. And secondly, it assumes that you made a lump sum investment at the exact worst moment in the first half of the 20th century.
The best defense against stock market misery is paying a rational price for your securities. If you are evaluating a large-cap stock that is trading above its valuation multiples that it has seen over the past decade, be careful before making that purchase. When stock prices are going up, it is easy to rationalize a lot of investments (although I should note that current stock market valuations of most blue-chips are nowhere near the lofty highs of 1929). When you look at the window from 1927 to 1929, it can be helpful to keep in mind that it is not the transition from fair valuation to undervaluation that necessarily causes the extreme downward fluctuations, but rather, it is the transition from overvaluation to undervaluation that makes the declines so pronounced.
Insisting on a margin of safety in your initial purchase price is still the best defense there is. There is a reason why The Intelligent Investor is in print after all these years. That principal is timeless. If you can stick to the "margin of safety" principal as the stock markets continue to ride higher, you can hopefully look over your own investment record years from now feeling more like the guy that invested in August 1927 instead of September 1929. The folks that paid a rational price for some top-quality blue chips in 1927 actually increased their wealth and purchasing power even immediately after the Crash of 1929. Of course, none of that shows up in most historical records.