Wall Street trader David Feldman lived through the Great Depression.
In 1997, at the age of 87, he set down his thoughts in a little memoir titled Ups and Downs of a Wall Street Trader during the Depth of the Great Depression of the 1930s. It’s interesting that he felt the need to append “of the 1930s” to his title, so as not to confuse it with others that would follow.
It was a brutal time. A short table of some issues selected at random by Feldman shows the damage:
Another writer on the Depression, Frederick Lewis Allen, wrote about how the market was “so honeycombed with credit . . . [that it] became a beautifully contrived system for wrecking the price structure.”
We saw that happen in 2008 with the forced liquidation of hedge funds and other investors operating with too much debt. Stocks dropped like birds shot out of the sky. Were the price drops entirely rational in every case? No.
And was General Electric really worth only $8.50 a share in 1932?
How about Warner Brothers at 50 cents? No.
After the crash, people and businesses did cut back. There was also consolidation among businesses. In the 1930s, Allen notes, there was
“more zeal for consolidating businesses than for expanding them or ini-tiating them.” With stock prices low, the cash-rich investors in corporate America had a chance to steal some things. Why invest in new oil wells when you can buy them on the stock market for less than half of what it would cost you to drill new ones? Why build new factories when you can buy a competitor for 20 cents on the dollar?
The aftermath of the crash is a good time to buy—with an important caveat, as Feldman points out: “Stock prices were so low that so long as a company did not go out of business, practically anything you might buy was certain to go up, if not sooner, then later.” (italics added)
We might call this “Feldman’s law of depression investing.”
You can’t be sure the stock you own won’t fall from $16 to $1.50. In fact, I owned some stocks that did just that. But my stocks came back.
Why? Because I was careful about owning stocks in good financial shape and with manageable debt levels. In cases where they did not come back and I was saddled with a big loss, it was always because I had invested in a weak balance sheet that couldn’t hold up in the crisis.
Feldman’s law is not as easy to apply as it may sound. By the end of 1933, more than 5,000 banks failed. Thousands of businesses also failed.
Auburn Automobile, for instance, traded as high as $514 per share in 1929 and went to near 0 in 1933. I’m sure to investors in 1929, Auburn at zero in three years was unthinkable. Such is the way of financial disasters.
The economic devastation during the 1930s is hard to fathom. Statistics alone fail to capture it all, but what we have is breathtaking. The amount of money paid out in salaries dropped 40 percent from 1929 to 1932, ac-cording to the National Bureau of Economic Research. Dividends fell 56 percent. The unemployment rate was about 25 percent in 1932. In Buffalo, unemployment was 31 percent, which was not unusual among America’s industrial cities.
A job in a South Carolina cotton mill might pay $8.25 per week for 11-hour shifts, five days a week. You were among the lucky if you got such a job. Children under 16 years of age toiled at textile mills for $3.10 per week.
Of course, a dollar was worth a lot more then than now. You could mail a letter for 2 cents and grab a cup of coffee for a nickel. The cost of gasoline was only 8 cents a gallon. Lunch might cost you a dollar. There were no lines.
An ounce of gold, before Roosevelt took the United States off the gold standard, was only $20.67. The exact same ounce of gold today would set you back about $1,400. “Some people have the rather naïve idea that a 2½% annual inflation rate is benign,” writes David Feldman. “Actually, 2½ % is horrendous! Compounded over a period of ten years, it results in a 28% cost-of-living increase.” (In terms of real returns, the 15 years following 1966 were worse for stock market investors than the 1930s be-cause price inflation was so high. In the 1930s, prices fell.)
What did it all teach Feldman? He lost a lot of money in the crash and its aftermath, like almost everyone else. “One thing that this experience taught me was that, in investing, you should never cry over spilt milk,” he writes. “Only the future is of importance.”
In 2008, I didn’t know whether we were headed for a 1930s-style de-pression. I think we were as close to such a precipice as at any time since the 1930s. As an investor, though, I knew—and wrote at the time—that valuations made it too compelling to leave the market then.
I also learned it was critically important to have some cash. “Cash was king,” Feldman writes of the depths of the Great Depression. “If you happened to have any, you were really in the driver’s seat.” Cash means you have options and you are not reliant on fickle lenders.
As the 17th-century wanderer and memoirist Jack Casanova wrote,
“My ill fortune no less than my good proved to me that . . . good comes from evil as evil comes from good.” Likewise, 2008 was a good fortune in disguise that allowed investors to pick up new holdings on the cheap.
So again we see the wisdom of the lessons learned from Odlum: it’s good to have cash and not be afraid to buy when things look bad.