The great depression of 1929 or the stock market crash still creates fear in the mind of the US. The crash is huge that many become bankrupt and lost their livelihood. Margin trading were practiced from 1922 and many started borrowing as if there is no fall in the stock market. This had brought everyone into the stock market. They couldn’t bear the losses.
In today’s terms the losses in that crash is worth 396 billion dollars. Stocks had bottomed only by July 8, 1932, from October 1929. Roughly 3 years it was a bear phase. There was a small jump for almost 50% which is called dead cat bounce in market terms. It eventually faded off.
The next peak of the stock market came only in 1954 which was almost 25 years. Ten years leading up to this crash had stock market seeing 400% returns. An annual return of around 20%.
Main reason for stock market crash ;
The top ten companies in that era controlled many other companies in the market by fraudulent accounting methods. This led to inflate the profits and eventually the stock price.
Fed trade commission had issued warning in late 1928 about these fraudulent methods. Another biggest concern was that the Government wasn’t regulating the stock market.
Some of the effects of this crash are economic wages falling to 42 percent, the unemployment rate increasing to 25 percent and the economy fell 50% after this depression.
5 Lessons from this 1929 stock market crash ;
Chasing growth stocks
Crashes are unforeseen
Crash may take years to bottom
Inevitable even when the profits are rising
Buy and hold may not work
Chasing growth stocks ;
Most of you may want to profit from investing in growth stocks. The ultimate reason is it has the momentum to grow. Stock has been rising consistently and it has showed profits in the last few quarters/years.
If the stock is not reflecting the balance sheet of the company then it is not worth investing in that stock. Let it have higher growth momentum.
Crashes are unforeseen;
This point holds true even in this era. The mortgage crisis was huge and it affected the entire world. Raghuram Rajan the yesteryear RBI governor had warned the impending crisis a few months before it had actually occurred.
Advance technologies in trading should provide warning signs for investors but again investing is all about emotions and it overtakes any logical decisions.
You can look out for any such news or be safe with your investment when the market is over-optimistic.
Crash may take years to bottom ;
It took 25 years for the market to bounce back from the 1929 crash. This shows the level of wound or scar it created with everyone. Only newspaper was the mode of conveying news and this may be one of the reasons for such a prolonged period.
In this era, it is easy to bounce back quickly may be within a year or two. But the scar is going to be the same as what happened during that crash
Inevitable even when the profits are rising ;
Due to improper governance of these companies, many were able to manipulate the accounts and show huge profits.
Now with proper regulators in place, it is not easy to manipulate for such a long period.
Buy and hold may not work ;
When the stocks are not moving for 25 years it can be the worst period for the stock market and for your investments. Though the investors received dividends, it may not be uniform.
Even in 2019, buy and hold strategy may not work if you had invested in the wrong stock as mentioned in the previous article.
Stock market crash can occur at any point in time, but are you prepared to watch out for the warning signs it provides is the point of this article.