Every bull market bust comes with lessons. One is that bull markets offer the illusion of permanence.
For example, the longer a bull market drags on, returns are more likely to be normalized and expected. When double-digit returns are all you know, the easy assumption is to expect more of the same.
It’s a repeated lesson because there’s always a new crop of investors experiencing their first bull market and some of the old crop forgets what the last bear market was like.
But some market busts are so impactful it creates a sea change. The hardest taught lesson was felt at the depths of 1932.
To the question that thousands of Americans are asking, “When is it safe to invest?” there are two answers. Both date from the beginning of the investment business:
“Never” for the coward or the visionary. “Always” for the reasonable man; in a world peopled by fallible human beings… The American investor seems to have disappeared. He is buried under the stupendous landslide of fear that has changed the face of the financial world. He is not killed but he stays where hie is, hoping for the best, but waiting for the worst…
Today, none of these — wise, cautious, or greedy — is in the market for securities because he sees only insecurities. He looks at the quotation pages, as he used to do in happier days, and learns that stocks and bonds are selling for a fraction of what he would have been glad to pay three years ago. He realizes that conditions have affected all earnings. But instead of trying to establish the relation between market prices and real values, he decides that a bargain cannot be a bargain when it is too much of a bargain. If you tell him that prices are so low because there are no buyers, he will ask why the wise rich and the hungry gold vultures of Wall Street pass up the bargains. You patiently explain the reason, but you merely convince him that prices are low, not that securities are cheap.
That account was published in the Saturday Evening Post on August 6, 1932. Though nobody knew then, the Dow bottomed the prior month — July 8th, 1932. It’s hard to imagine what a three-year-long market decline — 90% loss peak to trough — feels like, but it was so impactful it rewrote the old way of thinking about investing and is still felt today.
Rolling into the late 1920s, articles like John J. Raskob’s “Everybody Ought to be Rich” spread the belief that you only needed to own a few good companies over a couple of decades and you’d be rich.
The idea of squirreling away money into stocks or bonds and thinking things would be peachy 10 years later was an illusion. But that was the thinking.
What Raskob, and others, failed to account for is whether good companies would remain good for twenty years. Or whether a “good investment” would still be good a decade later.
Don’t think you can buy and go to sleep for ten years, trusting to your banker’s assurance that the investment is permanent… Consider investments of every period of history and you will find that a great adverse factor has always been change, which is something nobody can prevent.
The depths of 1932 taught that no investment was “safe” in the long run — not good companies, not good stocks, and not even good bonds. It showed that deep drawdowns and prolonged periods of underperformance were not only a possibility but a reality.
Survival through similar episodes became the new goal. Big authors from the era, like Ben Graham and Gerald Loeb, would recreate their investment philosophies around it. While very similar in many ways, they each approached it differently.
Graham created the framework for value investing. Loeb followed trend.
Graham pushed for investing in undervalued companies with a wide margin of safety to limit the impact of losses and being wrong. Loeb believed some speculation was the only way to earn a high enough return to overcome the inevitable losses, mistakes, and unexpected events felt by investors.
Graham believed securities should be sold once they reached a fair value. Loeb preferred to cut the losers quickly and let the winners run. For both, vigilance was needed because nothing was permanent.
They created two different approaches with the same goal in mind — preservation of capital. For them, the absence of change was the illusion.
When Is It Safe To Invest?
- Realistic Investment Results – Of Dollars and Data
- America’s Decade – Albert Bridge Capital
- Total Return is a Technology – J. Zweig
- Stale Pricing Does Not Equal Low Risk or Low Correlation — Behavioral Investment
- It’s Time for a Venial Value-Timing Sin – AQR
- Masters in Business: Eugene Fama and David Booth (video) – MiB podcast
- Practical Quant: Jack Forehand on applied value (video) – Acquirer’s Podcast
- The World Has Gone Mad and the System Is Broken – R. Dalio
- Has The World Gone Mad? – PragCap
- The Myth and Magic of Generating New Ideas – New Yorker
- The Fisherman’s Secret: A Modern Day Treasure Hunt – SF Chronicle