Lessons From 1929

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Lessons From 1929

Tuesday is the 90th anniversary of the crescendo of the 1929 stock market crash, an event that still captures investor attention almost a century later. We know many of our clients are students of market history, so to mark the occasion let’s review a few less-appreciated lessons of the event and its aftermath.

To start, here is a chart of the Dow Jones Industrial Average from 1915 to 1955. While academics use a reconstructed S&P 500 in much of their work, the Dow was the only broad market indicator actually in use before, during and for decades after the 1929 Crash.

This picture puts the pain of the Crash on full display:

  • From early September 1929’s Dow peak of 362 to the trough at 47 in June 1932, US stocks fell by 87%. Those who “panicked” or were forced out on Black Monday/Tuesday of October 1929 actually sold at good prices relative to where the market settled out almost 3 years later.
  • Those 1932 Great Depression levels were lower than even the period prior to World War I, when the Dow first broke above 100 in October 1916.
  • It would not be until November 1954 – 25 years after the Crash – before the Dow finally broke above the September 1929 highs.

But the data also highlights some facts often missed in the discussion of the October 1929 and its lessons for sensible, long term investing:

  • Yes, September 1929 was a terrible entry point for US equities. The worst ever, in fact.
  • But an investor who bought one unit of the Dow (or constant fraction thereof) at the start of every month from January 1920 to September 1929 would have had a cost basis of 146, fully 60% below the 362 top.
  • Assuming that methodical investor stopped buying with the Crash, they would have recovered all their capital by January 1936, when the Dow opened at 146.3. That is only a span of a little over 6 years, and it doesn’t include dividends.
  • Even an investor who waited until 1925, when the Dow began its breakout, and bought every month until the crash would have had a cost basis of 196. By the end of World War II (January 1946, to be precise), they were whole.

The bottom line here is that dollar cost averaging shortened the time needed to recover losses from the 1929 Crash and its aftermath to anywhere from 6 to 17 years versus 25 years. The math only gets more compelling for investors who kept buying into the teeth of the Great Depression:

  • Buying one unit of the Dow at the start of every month from 1925 through 1934 would have yielded a cost basis of 162 at the end of that 10-year run. Some of those purchases were at horrible prices (1929) and others were better (1932).
  • Such an investor would have been in the black 18 months later (mid 1936).

Yes, such resolute investors are rare and during times of national economic distress many obviously sold because they had to, not because they wanted to.

We’ll end this section with an observation a money manager made to us during the 2008 – 2009 version of the 1929 stock market crash: “My clients didn’t give up on stocks – they gave up on America.” In the end, that is what creates dramatic lows like 1932 and 2009. As long as American society remains resilient, its economy and stock markets will always recover.