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
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 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 the impact of the crash of 1929 on US and the world? ›
Men and women lost their life savings, feared for their jobs, and worried whether they could pay their bills. Fear and uncertainty reduced purchases of big ticket items, like automobiles, that people bought with credit. Firms – like Ford Motors – saw demand decline, so they slowed production and furloughed workers.
What were the important facts about the stock market crash of 1929? ›
On Black Tuesday (October 29) more than 16 million shares were traded. The Dow lost another 12 percent and closed at 198—a drop of 183 points in less than two months. Prime securities tumbled like the issues of bogus gold mines. General Electric fell from 396 on September 3 to 210 on October 29.
What was one of the most important factors of the 1929 stock market crash quizlet? ›
The stock market crash of 1929 happened because the share prices had been rising at an unsustainable pace in the years prior to the crash. This was due to the overconfidence of the investors in sustained economic growth as well as the practice of buying shares on the margin.
Who benefited from the 1929 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 were three major reasons that led to the stock market crash? ›
In addition to the Federal Reserve's questionable policies and misguided banking practices, three primary reasons for the collapse of the stock market were international economic woes, poor income distribution, and the psychology of public confidence.
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.
What were the four main effects of the Great Depression? ›
Factories were shut down, farms and homes were lost to foreclosure, mills and mines were abandoned, and people went hungry. The resulting lower incomes meant the further inability of the people to spend or to save their way out of the crisis, thus perpetuating the economic slowdown in a seemingly never-ending cycle.
How can the lessons learned from the Great Depression 1929-1941 help prepare Americans for another economic depression? ›
Final answer: The lessons learned from the Great Depression can help prepare Americans for another economic depression by emphasizing the importance of financial resilience, community support, and government intervention.
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.
What do you think was the biggest effect the Great Depression had on the world? ›
Although it originated in the United States, the Great Depression caused drastic declines in output, severe unemployment, and acute deflation in almost every country of the world.
What ended the Great Depression? ›
Mobilizing the economy for world war finally cured the depression. Millions of men and women joined the armed forces, and even larger numbers went to work in well-paying defense jobs. World War Two affected the world and the United States profoundly; it continues to influence us even today.
Why is October 29, 1929 known as Black Tuesday? ›
A crowd of investors gather outside the New York Stock Exchange on "Black Tuesday"—October 29, when the stock market plummeted and the U.S. plunged into the Great Depression. On October 29, 1929, the United States stock market crashed in an event known as Black Tuesday.
In what three ways did the depression change American society? ›
high school dropout rates increased since teens needed to help support their families. crime rates increased since unemployed workers would steal to get food for their families. entertainment decreased since individuals could not afford to go to the movies.
What were the four main causes of the Great Depression? ›
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.
What is the cause of the stock market crash? ›
Stock market crash: Rising US dollar and Treasury yields, disappointing US retail sales data, falling Indian National Rupee (INR), and rising crude oil prices are some other reasons that have fueled the selling pressure in the Indian stock market.
What was the start market crash of 1929? ›
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.
What caused the stock market crash of 2008? ›
Key Takeaways. The stock market and housing market crashes of 2008 trace their origins to the unprecedented growth of the subprime mortgage market that began in 1999. Fannie Mae and Freddie Mac made home loans accessible to borrowers who had low credit scores and a higher risk of defaulting on loans.
