A Glimpse at Oil Stocks In the Great Depression

I’m working my way through a 1985 book called The Crash and Its Aftermath: A History of Security Markets in the United States, 1929-1933, which covers the darkest days America has ever known.

In 1932, during the depths of the Great Depression, the long-term United States Treasury bond yield was 4.25%. At this moment in time, some of the biggest oil stocks in the nation had fallen by up to 96%. That means a $100,000 investment would be selling for $4,000 for a loss of $96,000. This was the worst wide-spread economic catastrophe in 600 years. In terms of actual human suffering, it was horrific.

Let’s look at one of the biggest, and most famous, of the oil giants: Standard Oil of New Jersey. At its peak, the shares traded for 82¢ on the dollar of book value and offered a dividend yield of 5.41%. When the market collapsed, the shares fell to 44¢ on the dollar and the dividend yield skyrocketed to 10.00%. The downside? Even though the company was an absolute steal, generating massive cash returns, no one could afford to buy shares; people couldn’t even afford to eat!

Those who were able to hold their shares, and reinvest their dividends, at those rock-bottom rates recovered years quicker than those who were unable to reinvest the dividends or add to their positions.

I don’t know if we’ll ever see a downturn like this again in my lifetime, but it will happen at some point. There is nothing new under the sun. All you can do is be prepared for it.

Michael Starke

Still being early in my investing career (and this is going to sound particularly horrible and selfish) I was hoping that the “lows” of the Great Recession were going to stick around for a while. (I still do not understand how anyone looking around can think we’re in nearly as good of shape as it appeared in the run up in 2007, but nevertheless, here we are at Dow 14,000 again.) I know that there are still good values out there but I have to search quite a bit harder for them now; I’m certainly not getting the sort of prices I was getting just shy of 4 years ago. I was lucky enough during the turmoil to maintain my job, and keep a pretty high savings rate, so I was able to buy into the lows, but there’s always that twinge of regret in hindsight that I wasn’t able to “double down” when the chance was available.
- http://www.facebook.com/joe.pierson.54 Joe Pierson
  
  It seems Public Pension Funds are doubling down on hedge funds to make up for 2008 losses, as nothing works unless they assume a 8%+ rate of return. It’s a paradox that a cure for a bubble is to promote another bubble.