First, the years leading up to the 1929 crash, also known as the Roaring 20's, have been amazing. People enjoyed tons of prosperity as USA was the only exporting powerhouse basically untouched by World War 1. Investing became popular as many US companies kept growing and the confidence in this unprecedented growth caused a long bull run on the markets. It was the time of innovation, and the time of credit proliferation. Never before have their been tons of ads for buying appliances, homes, cars and more with a downpayment, and paying the rest off month to month. Suddenly, companies were no longer just exporting more stuff overseas, but also found more domestic customers for high ticket items, as well as innovative products. Stoves, fridges, toasters... all of these and more were suddenly in the homes of most consumers out there. And hey, if for example you can buy everything you want for 10 percent down, this means you can afford the same amount of stuff someone with ten times your money could if they were buying everything at once. Now, even those people would buy ten times what they could afford.
Now, dearest readers, you and I know that we live in similar times- times of credit and on top of that low interest rates; we are very used to living outside our means and our world is built on that foundation, for better or for worse. However, imagine this kind of buying power and access to credit have been proliferated for the first time ever right in your lifetime as you are leaving school and getting a job. You may go nuts and spend like there is no tomorrow, to the limits of your income to keep servicing your debts for all the stuff you bought to improve your life and be happier. Now, imagine you also get into stocks because at that time most people believe that growth has become infinite and it will never end and never slow down too much. You would not only want to buy shares of the top blue chip stocks of the day, but would also love to buy tons of shares with just ten percent down.
Dearest readers, welcome to the world of 1920's where people are buying stocks with 10 percent down in order to hold them! Does this blow your mind? Does this sound damn crazy? It is called buying on margin, and today people use it only for crypto speculating long term (this backfired most of the time and still does), or for day trading stocks forex CFD's etc. If I did something like this, I would do it only for day trading because I would want to exit quickly if a drop threatened to eliminate my 10 percent down, otherwise I would end up losing more than I invested. Still, it is too damn risky for most sober headed people. Yet, in 1920's people had so much faith in the markets that they bought and held on margin like crazy! Blue collar, white collar, celebrities- everyone bought in. Oh, and they were so confident they would take their entire life savings and buy on margin off of that! Today, we keep getting warned again and again by investment experts not to invest more than we can afford to lose.
Finally, we had rich industrialists and adjacent wealthy business owners who amassed money through real growth and then pooled investments together to pump and dump blue chip stocks of the time. RCA, a company most of us know (cheap TV's. tablets etc) was the most famous blue chip tech stock that went all the way up to over $500 per share in 1920's dollars and was split multiple times! This was done by rich investors' pump and dump pools, and every dump hit small margin investors as they kept doubling down, coming back for more because they kept winning overall. Meanwhile, the stock prices no longer had anything to do with the true value of the underlying companies, and the stock market was fast becoming the business of speculating and identifying volatility, trends, price action.
Oh, and how they talked about it! The stock market was the talk of the town in every town, every level of government, every social circle. It was in the newspapers, in popular songs, in poetry, in the movies... pretty much like it is today, if not more.
This unprecedented period of wealth, opulence and growth, as well as market and investment access to the masses was stopped dead in its tracks in 1929. How bad was it? Apparently, in one of the worst days you could not sell a share of RCA for even as low as $26, from highs of over $400! It was a shock, people defaulted on their loans, could not cover their margin calls, and ultimately even those who had extra money left over because they did not go so crazy into investing on margin and the buy now pay over time schemes, well they ended up doing a run on the banks which consequently failed because they could not provide so much cash all at once. It was chaos thereafter and, without Pearl Harbor, I highly doubt that USA would ever even try to join the war effort in World War 2 after the crash and economic depression they went through, which means that today we could have ended up living in a completely different world (sorry to go off on a tangent, but it is important to mention).
So, dearest readers, how scary is it that the reality leading up to the 1929 stock market crash is very similar to the one today? Personally, after seeing that documentary, I think that the Covid-triggered crash was not the real crash after all, and that the real one is yet to come. An interesting bit from the documentary is that major market crashes come around without any help every 30 years or so because that is how long it takes for us humans, as a society, to think we can take the same path as before but do it better this time around. Only, we always fail and so far failure is just as sure as the fact that everyone who is born ultimately dies.
So, if we know that major market crashes cannot be prevented, how do we handle them? Well, by now it is clear that we handle them by first learning our history well, and THEN learn from it! What did I learn? Here are a few highlights:
- If you invest, there is a good chance you will lose some or all of the money.
- Never invest what you cannot afford to lose.
- Do not invest on margin; trade on margin only if you severely limit the margin and cut losses quickly.
- If you are investing in inflated stocks, look for short term winning patterns and price momentums, exit with those short term profits, then reinvest them to benefit from compounding. Do not just let the money sit for a long time completely untouched or managed for just a small return.
- Have multiple investment streams e.g. RRSP plus a crypto account for active trading.
- If you run a business or work a job that is not essential during an economic depression that can follow a major stock market crash, you need to have healthy profit margins, save more than most people and invest more than most people because chances are you will be out of income for a while and may have to reinvent yourself.
There you have it, dearest readers. Take a look at the video, share your thoughts and I hope you invest smart out there. :)