June 25, 2018

I just finished The Great Crash 1929. When thinking of the current stock market and lot's of cheap money in circulation, here is what I learned:

  • Regulation in 1929 was much more loose than it is today. The SEC for example was only established as a consequence of the crash.
  • Once the depression was under way, government didn't increase spendings to support the economy. Their focus was to balance the government's budget by reducing expenses which sent the economy deeper into depression.
  • Shortly before the 1929 crash, market volatility was high, several 'light' crashes happened and still everyone was convinced that the markets were strong (or at least they pretended to not loose their own investments).
  • Throughout the 1920s the economy was strong, everyone was optimistic and because of the boom of the past, everyone wanted to join in on becoming rich by buying shares. This ruthless optimism fueled by the past let the markets skyrocket to just fuel that same optimism even more. Just like bitcon in recent years and dot-com-boom in 2000? ;)
  • People were speculating that prices are rising and not investing in assets that have an inherent economic value (speculating vs. value investing).
  • Pyramid-like fonds structures where one fonds invested in another fonds that invested in a third fonds combined with lot's of borrowed money for leverage just leveraged the crash.
  • The U.S. had a trade balance surplus back then? Didn't expect that...
  • Because the crash is on everyone's mind, the next crash gets more likely as time moves on and people forget about the crash.

What does that say about today? Is a crash more or less likely?

  • Less likeley because there have been lots of learnings being implemented since the last crash(es).
  • More likely because money is cheap and lot's of money inflates prices.
  • Less likely because one would assume that institutions like central banks are more sophisticated than in the past (with regards of cheap cash).
  • Less likely because the last crash happend just a few years ago and people are still sensitive to the dangers of speculation.
  • More likely because stock prices of risen for quite a long time now and a bear market is somewhat overdue.

In the end and since I am a fan of value investing, buying assets that are generating money as opposed to buying things in the hope of rising prices (bitcoin) combined with the ability to invest for the long term is still the winning strategy. Everything else is gambling. :)


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