Benjamin Roth kept a diary throughout the Great Depression. His diary was turned into the book The Great Depression: A Diary which offers a unique take on the time period from a financial perspective.
Roth realized early that he was witnessing a major financial crisis and wanted to learn from it. So he started journaling in 1931. He jotted down his thoughts on stories he heard from clients and events he observed. He tracked the stock market, local stock prices, and the economy both locally and nationally.
Three big things in Roth’s diary stood out.
First, one thing Roth repeated over and over was the lack of cash to buy bargain stocks. Nobody had money. The combination of a 90% market decline and widespread bank failures destroyed people’s savings.
Even the banks that didn’t fail basically froze their customer’s savings accounts. Limits were set on how much money a customer could withdraw in a day. In some cases, it was as low as 5% of the money in their account.
Things got so bad that people sold their passbooks (a record of their bank account) at 50% or less of the amount in their account just to get cash. It wasn’t a rare occurrence either. Prices on passbooks were quoted daily in the newspaper.
Depression-era scrip issued by local governments or businesses was also common because of the scarcity of cash. Though, the scrip came with trust issues. Not all businesses accepted it. Arguably, the single biggest improvement from that era was FDIC insurance on bank deposits.
Second, some people failed to learn from the ’29 crash. Several times Roth told stories of people he knew, who lost everything in the ’29 crash, only to repeat the same mistake again four or five years later.
They luckily bought stocks near the lows of the Great Depression, rode the recovery, and made another small fortune. But rather than sell or leave it alone, they got greedy. They maxed out their accounts on margin to buy more stocks, only to watch the market turn and got wiped out again. The power of desperation and greed over investment decisions is hard to overcome.
Finally, throughout his journal, Roth worked out a sound investment theory over that period. He laid the bulk of it out over the span of six years (1931 to 1937).
He figured out early on that markets moved in cycles. While he failed to see the difficulty in market timing early on, he realized the importance of capital preservation, diversification during severe drawdowns, and buying bargains at the bottom of a cycle. He was quick to see the dangers of speculation and leverage. More so, he realized the impact behavior played on returns.
Here are his thoughts:
- The rules of conservative investment apply whether you buy real estate or stocks or bonds. Thorough investigation is the first necessity — safety of the principal — and it usually follows that only a fair return on the investment can be expected. To seek a high or unusual return means greater risk and speculation.
- As nearly as I can make out from a study of past panics, the cycle of business is always moving down toward a panic or up toward a boom. It rarely for long travels in a straight line.
- The wise investor will disregard the day-by-day fluctuations of the stock market or real estate market and base his buying and selling on these long periods of rise and fall.
- It is difficult if not impossible to do this but the conservative longtime investor who follows the general rule of buying stocks when they are selling far below their intrinsic value and nobody wants them, and of selling his stocks when people are bidding frantically for them at prices far above their intrinsic value — such an investor will pretty nearly hit the bull’s-eye.
- It is my conclusion that the successful investor must cultivate the habit of “patience.” He must be able to hold his money and wait until it is really the time to buy… I suppose the real investor would then have the patience and courage to wait until normal times returned before selling. Patience to wait for the right moment — courage to buy or sell when that time arrives — and liquid capital — these are the 3 essentials as I see it now.
- It is funny how when the stock market is rising every piece of news is regarded optimistically and bad news is ignored.
- This depression has indelibly impressed on my mind one thing — and that is the value of having on hand sufficient capital to cover emergencies. In the investment field it means the difference between success or failure to have enough capital to buy bargains when they are available or to hold on to investments thru thick and thin and not be forced to sell at a loss.
- To build an estate it is necessary first of all to get money by saving it and secondly it is most important to invest these savings so that they will increase and work for you without losing the principal.
- Somewhere in between the ultra-conservative man who is afraid to take even a legitimate risk and the avaricious gambler who bets on anything — stands the ideal investor who has learned to make his money work for him. He accumulates money first by savings — then he carefully investigates and weighs a dozen investments before he finally selects one to put his money in. He is willing to take a legitimate risk but is not willing to gamble.
- If he invests in stocks or bonds he will not follow blind tips or rush into a seething market with thousands of suckers—but in the quiet of his office he will carefully examine the earnings records of the company, its future prospects. He will seek advice if necessary and then buy only if he thinks the price is fair and the prospects good. He will hold on for several years and share in the growth of the company and will sell only if the company loses ground or if a stock-crazy public offers him much more for his stock than its intrinsic value.
- The American people look upon the stock market as a place to gamble and not to invest. In times of rising market the average American becomes over-optimistic: he invests his whole capital in common stocks of the most speculative variety; often extends himself on margin. Then when a slump comes he finds himself over-extended; no cash reserve to fall back upon; he becomes unduly pessimistic and sells at a loss.
- The investor must organize all the material around him so he can use it in a simple way. He must disregard the non-essential. He must discipline himself and realize that the investment of surplus funds is all-important and requires work and diligence.
- It becomes increasingly clear that nobody can predict the future behavior of the stock market.
- A stock broker after 40 years experience said to me today: “The only people I know who ever made money in the stock market are those who bought for cash and owned the stocks outright. I do not recall a single margin trader who did not lose sooner or later.”
The Great Depression: A Diary
- The Power of Narratives – Klement on Investing
- The Rich And The Wealthy – M. Housel
- EM Crisis Investing, a Deeper Dive – Verdad
- The Popping of the Bubble Stocks: An Update – R. Dalio
- Have Growth Stocks Bottomed? – J. Rekenthaler
- Howard Marks on Investing Risk (video) – Wharton School
- Ted Weschler: Lunch With Warren Buffett, Working for Berkshire Hathaway, and the Future of Investments (podcast) – I Am Home
- The Strange Business of Hole-in-One Insurance – The Hustle
- 103 Bits of Advice I Wish I Had Known – The Technium