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The 2009 Great Depression: Why Stocks Are The Best Pre & Post Crash Investments
by Alexander Green, Oxford Club Investment Director
Monday, March 2, 2009: Issue #946
If you’re like me, you keep hearing analysts and investors who insist we are in another Great Depression and that stocks will keep falling not just for weeks or months but for years.
For reasons I’ve explained before, I don’t buy it.
But what if they’re right? Let’s take a look at the potential investment ramifications.
The Great Depression of 1929
In October 1929, the stock market crashed. And it wasn’t until July 8, 1932 that the carnage finally came to an end. By then, the market value of the greatest corporations in America had declined an astonishing 89%.
Right now we’re in the midst of the second-biggest drop in the stock market in the last hundred years.
The Dow has lost roughly half its value since the October 2007 peak. And it may fall further still. (Trust me, the market can always fall further.) What can the Great Depression teach us at this juncture?
Well, let’s say you had the fortitude to invest in stocks at the end of 1930, after the market had fallen 50%. This was by no means the bottom. The bear still had 18 months to run. But you couldn’t have known how that bear market would end, just as you can’t possibly know how this one will end today.
But let’s say you stepped up and bought stocks at that point. Even though the economy had a full decade of depression ahead, equities:
- Delivered a return that beat inflation by 4% annually over the subsequent 10 years
- And 5% annually over the next 20.
This is after inflation, mind you, and despite the fact that the Dow had three of its worst years ever - 1931 (-53%), 1932 (-23%) and 1937 (-33%) – during that period.
In the two decades that followed 1931, nothing else – not bonds, cash, precious metals or real estate – did nearly as well.
Stocks Always Deliver Generous Returns
The lesson is that from these depressed levels, stocks will almost certainly deliver generous returns in the years ahead.
- If you have cash, ignore the fear mongers and naysayers and put some of it to work in the market now.
- If you’re cash light, at least maintain your exposure to equities and reinvest your dividends.
- If history is any guide, you will be rewarded for doing so.
Of course, I can already hear critics shouting that with the market at a 12-and-a-half-year low, this strategy hasn’t worked for buy-and-holders lately.
First off, I’m not recommending that you buy and hold…
Asset Allocate, Diversify & Use Trailing Stops
Those of you familiar with our investment principles know you should either asset allocate and rebalance – which both reduces risk and increases returns – or diversify broadly and use trailing stops behind your stock positions.
It’s also worth noting that it was 12-and-a-half years ago when Alan Greenspan originally warned us about a frothy stock market and the dangers of “irrational exuberance.”
No one is making those noises today. Irrational exuberance is as dead as Che Guevara.
And while true contrarianism is by definition a lonely business, 10 years from now this market is likely to be viewed as one of the great buying opportunities of our lifetimes. Just as it was for those with the cash – and the guts – to buy during the Depression.
Many investors will disagree, of course. And that’s fine.
As George Santayana famously said, “Those who cannot learn from history are condemned to repeat it.”
Good investing,
Alex
P.S. If you haven’t done so already, I urge you to sign up now for our Annual Investment U Conference this month in St. Petersburg, FL. It’s a great way to hear the latest advice from our panelists. I’ll be joined by over a dozen experts from around the country as we give attendees our best recommendations on what you should do right now. You can find more information and sign up here.
Today’s Investment U Crib Sheet
You can guess what the market is going to do and be right or you can guess and be wrong. No one guesses right consistently. So we don’t waste time with that.
Instead, we follow a wealth-building investment formula that won Dr. Harold Markowitz the Nobel Prize in finance in 1990. His paper promising “portfolio optimization through means variance analysis“ demonstrates how to maximize your profits and minimize your risk by properly asset allocating and rebalancing your portfolio.
Following this model and rebalancing annually ensures our portfolios will be well diversified and positioned to profit in any market condition. And yes, investing success can be this straightforward.
Learn more about The Oxford Club’s asset allocation model here.
- Lessons From Japan’s Great Depression
- Investment Advice: Don’t Take A Shovel To Your Stock Portfolio
- Why Stocks Do Better When Congress Is Out of Session
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10 Responses to “The 2009 Great Depression: Why Stocks Are The Best Pre & Post Crash Investments”
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Alexander Green is the Investment Director of The Oxford Club. A Wall Street veteran, he has over 20 years experience as a research analyst, investment advisor, financial writer and portfolio manager.
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March 2nd, 2009 at 1:10 pm
Recommending that investors buy now and not wait for a “bottom” is not “contrarianism”, as you say, but is rather the recommendation of the mainstream. For months now we’ve heard nothing but calls to get-in and not try to call the bottom from most advisers. As to where we’ll be in 10 years, I’d quote Keynes: “In the long run, we’re all dead.”
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March 2nd, 2009 at 2:00 pm
Alex, Is this a good time to start your “Gone Fishing Portfolio?”
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Bill Reply:
March 8th, 2009 at 9:43 am
Is this a good time to start ” Gone fishing”.
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March 2nd, 2009 at 2:49 pm
Dear Alex, my retirement savings and investments are now down 55% and I have no cash to invest, because I am retired. My income is minimal and I am counting to live off my investments. So, who is to benefit from your wisedom? The unemployed with no income? the retired who do not receive monthly pension payments of substance, or just those who had the guts and sold for cash before the crashing started and continued?
Simserim sim sim sim sim, Julf
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March 2nd, 2009 at 4:13 pm
With all due respect, and with the full knowledge that you have been active in the market longer than I have, your optimism seems like the south end of an ostrich whose north end is buried in the sand. Too many cycles are all coming into play at the same time. This is different from all our previous crises; the old rules no longer apply.
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March 2nd, 2009 at 5:51 pm
Did you see the market today? Before or after you wrote this?
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March 4th, 2009 at 9:57 am
I think most companies printed stocks just to feed
the demand for baby boomers. If you add up the total net worth of most companies then divided it by the number of stocks they printed. The stock are not worth, in dollars, the paper there printed on. There is no doubt in my mind that there were illegal activities there too.
What we have here is something similar to Great Tulip Mania and we will be laughing at ourselves
for many generations to come.
Maybe things will change in the future. I sure hope so.
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March 8th, 2009 at 1:12 pm
Regardless of where the market ultimately bottoms and for how long, the market will have plenty of buy opportunities. There were 21 rallies of at least 5% from the 1929 top to the 1932 bottom. Now, that does NOT mean you can ID each! But, it = opportunity.
The longer a downtrend, the greater the magnitude, the more you should think, “Opportunity”, rather than herdist, PIED PIPER RAT laggardism.
The average herdist knows how to read the newspaper headlines (5 words on average – and is written at the 3rd grade level, so big deal), can find news (it’s everywhere and requires no skill), yet sucks at investing, and always will, so why should I follow them?
Herdist Pied Piper Ratism has created so many problems in the world. I might as well try to find the opportunity they present.
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March 8th, 2009 at 3:33 pm
Fully agree that one have to consider investing for the longer term but when would be a better time to start investment in equities? If equity prices are to drop another 50% and with the same capital the investor could double the investment holdings. And definitely collect twice more the dividends or run doubly fast when prices pick up. Considering the Dow had three of its worst years ever – 1931 (-53%), 1932 (-23%) and 1937 (-33%) -during that period, then my preference is to invest later.
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March 8th, 2009 at 7:16 pm
Alex
If your advice makes sense, then from extrapolation the market would pick up somewhere around July 2010 onwards. So if one still has some cash the time to start “nibbling” good stocks is from end of this year onwards.
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