Sunday, 14 December 2008

1931 and 2008: Will Market History Repeat Itself?

NOVEMBER 22, 2008
1931 and 2008: Will Market History Repeat Itself?

Over the two weeks ended Nov. 20, 2008, the Dow Jones Industrial Average fell 16%. Over the two weeks ended Nov. 20, 1931, the Dow fell 16%.
If you think that is scary, consider this: In the final five weeks of 1931, the Dow fell 20% further. Then it went on to lose yet another 47% before it finally hit rock-bottom on July 8, 1932.

It is vital to realize that markets are never under some obligation to stop falling merely because they have already fallen by an ungodly amount. It also is vital to explore how bad the worst-case scenario can get and to think about how you would respond if it comes to pass.
When it comes to worst-case scenarios, 1931-1932 is it. When the Dow finally stopped going down, in July 1932, it had lost 88% in 36 months. At that point, only five of the roughly 800 companies that still survived on the New York Stock Exchange had lost less than two-thirds of their value from their peak in 1929.
Look back at issues of The Wall Street Journal from 1931, as I did this week, and you may get the chills comparing it to today. "When the [automotive] industry in the near future resumes operations," declared one front-page article on Nov. 9, "it will enjoy the benefits of substantial reductions in labor costs."
The U.S. economy, as measured by gross national product, shriveled by 14.7% in 1931. Although no one expects the economy to grow in the fourth quarter of this year, it is flat year to date and shrank by "only" 0.3% in the third quarter. In 1931, one out of every six Americans was unemployed; today, one in 16 is out of work.
I don't foresee another Great Depression, but I am under no illusion that it can't happen. My parents and grandparents lived through it, and their memories of it have been branded on my brain.
If we are going into another depression, then a residual holding in stocks will be the least of your problems. Depressions hamstring nearly all forms of wealth, not just stocks. From 1929 through 1937, cash earned a compound annual return of 0.7%; intermediate-term bonds, only 4.4%.
None of us can control what the markets do to us. But we can control how we handle money, and we need to learn from our parents and grandparents who survived the Great Depression.
My grandfather was one of those people. An immigrant who bought a farm outside of Albany, N.Y., he literally became a horse trader. He bought wild horses from the Sioux in Montana for $1 apiece, transported them in a railcar to Albany and sold them for $10 each -- after his sons, whose labor cost him nothing, broke and tamed the horses.
In November 1931, my father was 15 years old. As the youngest of three brothers, he was stuck with the worst chore: fetching water at 5 a.m. He had to hang two buckets onto a shoulder yoke, fill them laboriously from the hand-powered water pump near the barn, then lug them back into the house. On winter mornings, the water would freeze on contact, and his trouser legs would creak and clatter as he carried the buckets across the snow.
Later that winter, my grandfather bought a gasoline-powered pump. The next morning, my father started the pump and filled the first bucket, excited at how easy his ordeal had become. The next thing he knew, his feet were dangling off the ground and my grandfather's fist was in his chest, pinning him against the barn wall. Terrified, my dad gasped, "Pop, what did I do?" The engine of the pump was going "ka-thump, ka-thump." My grandfather growled, "You hear them thumps? Every one of them thumps is a nickel!"
He was furious that my father had not turned off the engine between buckets.
I'm going to take a chance and hang onto my stocks. But I'm going to make sure, over the months and years to come, that I turn down the thermostat.

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