The Depression bear market

Author Taylor Larimore recalls his personal experience of the 1930’s great depression in this guest post.

Personal and financial history can be helpful to understand how stock and bond markets work.

stockcrashheadline
1929 stock market crash

I was eight years old in May 1932, when the Dow declined 89%. My Grandfather, Christopher Coombs, was a principal in the United Founders Corporation which was the largest investment trust (now called mutual fund company) in the United States. My father’s restaurant business (Larimore’s Diner in Foxboro, MA) folded and we moved into Grandfather’s Miami home (1 of 3).

My grandfather was nearly 100% invested in stocks purchased on margin. He lost nearly everything.


BEAR MARKET OF 1929-1937 (Dow plunged 89%)

Year1929193019311932
Large cap stocks-31.00%-25.00%-43.00%-8.00%
Mid/Small cap stocks-34.00%-35.00%-47.00%-6.00%
Micro cap stocks-47.00%-38.00%-50.00%-5.00%
5 yr Treasury bonds4.00%7.00%-0.20%9.00%
hooverville
Hooverville  in the Depression

Figures cannot convey the horrifying and debilitating effects of a bear market. You watch in agony as month after month your life savings evaporate before your eyes. Gloom and doom talk is everywhere. Nearly everyone else is selling. You have no idea when, or if, your portfolio will stop losing money.

Your friends and relatives urge you to sell before losing everything. Nearly all financial ‘experts’, including newspapers, magazines, and radio commentators recommend “sell”. You are ridiculed for trying to hold on. You begin to have self-doubt. Despair sets in. Buying stocks is unthinkable. Suicide’s increase.

Most stock investors in the 30’s sold and never returned to the stock market. Many ended their days with their family in poverty. I remember the “poor farms” on the edge of towns. There were no social security retirement benefits. Beggars were everywhere.

What about a balanced portfolio

It was a different story for the investors who were diversified and DID NOT SELL. A wealthy investor, holding $1,000,000 in an actual balanced fund  (the Wellington Fund) in 1929 would have realized the following capital values, assuming the investor bought and held the fund during the Depression era.

YearAnnual returnNominal $
1929-4.21%$957,900
1930-21.21%$754,729
1931-26.43%$555,254
1932-1.82%$545,149
19336.83%$582,382
193420.33%$700,781
193535.33%$948,367
193631.31%$1,245,300
1937-35.41%$804,339
193819.11%$958,049
193910.31%$1,056,824
19400.16%$1,058,514
1941-3.91%$1,017,127
194216.62%$1,186,173

I doubt if any bear market will equal the severity of that one when I was a boy. However, if we understand how markets work the lesson is clear:

  1. Selling near the bottom of a bear market is a sure way to lose money.
  2.  It requires courage, but NOT selling in a bear market has always rewarded investors with a profit.
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