Deja vu all over again?

Benj Gallander and Ben Stadelmann
Monday, March 19, 2007

As George Santayana said, “Those who do not learn from history are doomed to repeat it.” Now, being the happy-go-lucky Contra Guys we are, this is not meant as a downer, but simply to acknowledge that understanding the past should allow for better future returns. Even if those numbers might be negative.

During the stock market gyrations of the past couple of weeks, many politicians, fund managers, analysts and countless other experts have been assuring the public that there is little danger. So we set the Wayback machine to the first tremors leading to the stock market crash of 1929, in hopes of finding out what some of the great minds of the day were saying.

While many people only hearken back to October, in March of that year a harbinger was unfolding as the market tumbled eight percent in one day. “Fear not,” the people were told via The New York Times, where this appeared: “The Federal Reserve had insured the soundness of the business situation when the speculative markets went on the rocks.”

Adding credence was Charles Mitchell, the president of National City Bank, a predecessor of Citibank: “Responsible bankers agree, that stocks should now be supported, having reached a level that makes them attractive.” It makes one wonder what irresponsible bankers thought. Regardless, the comfort level was re-established and stocks renewed their ascent.

This led John Raskob, the builder of the Empire State Building, to write a summer article, “Everybody Ought to Be Rich,” for the Ladies’ Home Journal. He opined, “If a man saves $15 a week, and invests in good common stocks, and allows the dividends and rights to accumulate, at the end of twenty years he will have at least $80,000 and an income from investments of around $400 a month. He will be rich. And because income can do that, I am firm in my belief that anyone not only can be rich, but ought to be rich.”

At that point less than one percent of the population actually owned stocks, a tidbit not often noted in historical annals. Somehow, given the shoeshine boys and elevator jockeys offering tips, it seems as if everyone and their grandma owned their private slice of the great capitalistic society.

After hitting a high of 386.1 on September 3, 1929, the market drifted downwards. Then, as The New York Times reported on October 25, “The most disastrous decline in the biggest and broadest stock market of history rocked the financial district yesterday.” The newspaper then reported how “five of the country’s most influential bankers hurried to the office of J.P. Morgan & Co., and after a brief conference gave out word that they believe the foundations of the market to be sound, that the market smash has been caused by technical rather than fundamental considerations.” Isn’t it somewhat calming to know that, even then, the debate between technicians and fundamentalists was in full swing?

On October 28 the market dropped 13.5 percent, but The Wall Street Journal had a somewhat reassuring headline: “Market Orderly in Record Drop.” The next day the Dow Jones surrendered another 11.5 percent and the WSJ reported, “Stocks Steady After Decline.” At this point the market was down 39.6 percent from the high.

Investor extraordinaire John Rockefeller apparently viewed this as an opportunity. He stated, “Believing that fundamental conditions of the country are sound and that there is nothing in the business situation to warrant the destruction of values that has taken place on the exchanges during the past week, my son and I have for some days been purchasing sound common stocks.”

Briefly he was correct, but in November the Dow sank further. It did not hit its bottom until July 1932, at which point 89 percent of its value had been wiped out.

Fortunately, for those believing in the “buy and hold” mantra, the Dow did recover to the high of September 3, 1929. However, it took until November 1954, to do so.