April 25, 2015

A Look at Some Major Stocks During the Bottom of the 1933 Stock Market Crash

We’ve talked about the 1929 period a lot lately, but what you need to remember is that it was a walk in the park compared to 1933.  It wasn’t until then that everyone had gone broke, given up hope, and sworn off stocks for life, leaving great businesses trading at double-digit dividend yields and a fraction of book value.  The crash of 1929 was a blip.  The depths of 1933 were like a nuclear bomb going off and leaving nothing but wasteland.

1933 stock marketBefore we get into this, we’ve already established that stock prices in 1929 were absurdly high.  No rational human being could have possibly acquired ownership stakes on those terms and thought to do well, with the typical issue trading at 30x earnings, representing a starting earnings yield of roughly half the yield that could have been attained by acquiring a long-term United States Treasury bond at the time.  

Buying the nation’s largest bank for 150x earnings is not a particularly intelligent thing to do when it should be trading at 10x earnings in a rationally priced world.  Still, it’s interesting to see how someone who bought in at the top of the market did, acquiring shares at the very apex of the speculative bacchanalia that overflew from Wall Street onto Main Street (or visa versa, depending on how you look at it).  It was the bursting of this bubble that caused stocks to become an absolute steal, but most people were starving to death, waiting in breadlines.  Feeding your family was a higher priority than buying a blue chip yielding more than 10%.

Here is just a partial list of the insanity, courtesy once again from the book I’ve been telling you all to buy.  It’s been out of print for 30+ years so it costs as much as a college textbook if you order it used through Amazon, but it should be in every serious investor’s library.

Coca-Cola traded at $2.66 for every $1.00 in book value, with a dividend yield of 7.79%.  This represented a 57% drop, excluding dividends, from the 1929 peak.

AT&T traded at $0.64 for every $1.00 in book value, with a dividend yield of 10.34%.  This represented an 82% drop, excluding dividends, from the 1929 peak.

Colgate-Palmolive traded at $0.44 for every $1.00 in book value, with no dividends distributed.  This represented a 92% drop from the 1929 peak.

Gillette (now part of Procter & Gamble) traded at $0.85 for every $1.00 of book value with a dividend yield of 13.77%.  This represented a 95% drop from the 1929 peak.

Procter & Gamble traded at $1.54 for every $1.00 of book value, with a dividend yield of 7.50%.  This represented an 80% drop from the 1929 peak.

Union Pacific traded at $0.28 for every $1.00 of book value with a dividend yield of 9.84%.  This represented an 80% drop, excluding dividends, from the 1929 peak.

Alleghany traded at $0.05 for every $1.00 of book value with no dividends distributed.  This represented a 98% drop from the 1929 peak.

Standard Oil of New Jersey traded at $0.51 for every $1.00 of book value with a dividend yield of 4.35%.  This represented 72% drop, excluding dividends, from the 1929 peak.

General Mills traded at $0.90 for every $1.00 of book value with a diviend yield of 8.33%.  This represented a 60% drop, excluding dividends, from the 1929 peak.

Pillsbury traded at $0.27 for every $1.00 of book value, with a dividend yield of 10.67%.  This represented an 85% drop, excluding dividends, from the 1929 peak.

Anaconda Copper traded at $0.09 for every $1.00 of book value, with no dividends distributed.  This represented a 96% drop from the 1929 peak.

General Motors traded at $0.67 for every $1.00 of book value, with a 12.50% dividend yield.  This represented an 89% drop, excluding dividends, from the 1929 peak.

Sears, Roebuck traded at $0.36 for every $1.00 of book value, with no dividends distributed.  This represented a 93% drop from the 1929 peak.

B.F. Goodrich traded at $0.40 for every $1.00 of book value, with no dividend distributed.  This represented a 94% drop from the 1929 peak.

Deere & Co. traded at $0.19 for every $1.00 of book value, with no dividends distributed.  This represented a 96% drop from the 1929 peak.

Reynolds Tobacco traded at $1.46 for every $1.00 of book value, with a dividend yield of 11.11%.  This represented a 59% drop, dividend excluded, from the 1929 peak.

IBM traded at $0.09 for every $1.00 in book value, with a dividend yield of 7.89%.  This represented a 70% drop, with dividends excluded, from the 1929 peak.

General Electric – it was perfectly rational.  It traded at $1.00 for every $1.00 in book value, representing a dividend yield of 3.64%.  This represented an 89% drop from the 1929 peak.

Losing 80% of your money isn’t hard to do when you buy a business that is worth 12x earnings and you pay 50x earnings for it.  The market overreacted on the other side, getting as cheap as it had been expensive.  Still, no true investor would have been caught holding boring blue chip Chase National Bank at 62x earnings in 1929!  Sixty two times earnings.  That is an earnings yield of 1.6%, while you could have gotten 3x to 4x that amount had you parked the cash in U.S. Treasury bonds instead!  And despite trading at more than twice what the overvalued stock market as a whole was, it had a lower return on equity!

It was such a bizarre time.  People lost their minds on the upside, and gave up all hope on the downside.  Anyone with money during these dark days got very rich.  Imagine buying into General Mills at accounting liquidation value and getting paid 8.33% in cash on your investment as you sit around doing nothing.

Remember this lesson, too: History has shown that if you have the psychology profile of almost all normal people, if a day like that ever comes again, you will not be buying.  Don’t let yourself forget that you, too, are subject to bias and have to work against it by focusing on rational facts, not feelings, when it comes to allocating capital.

The only time we’ve seen things like this, other than a single month in March of 2009, was in the 1973-1974 period.  Those were beautiful.  I wasn’t alive  then … but I’d love to see a year when everyone hates stocks and they are sitting there, unloved, in public, totally neglected.

It was from these depths in 1933, that stocks went on an amazing 4 to 5 year streak, skyrocketing.  No one cared, though.  They had been too burned by wanton speculation and borrowed money.  It’s like those people you see now who swear they will only rent for the rest of their lives because they lost their home during the foreclosure crisis.

  • Tricia Drake

    ah, there are “most people” and there are most people. I have met several people who bought up stocks in the early 1930’s, and I suspect that a lot of people did. Every seller has a buyer. They probably didn’t want to brag to their friends who were standing in breadlines.

    I have tried to explain to people why it rarely makes since to swear off home ownership. They will probably never understand. I worked out for someone once that they would end up paying several million dollars more than me in their lifetime, even if I had an incredibly high cost of normal maintenance, but they still felt it was cheaper to rent.

    • Gilvus

      Financial myopia hurts when it afflicts people we care about. It’s awesome when you’re buying from someone whose name, face, and aspirations will forever be unknown to you.

      Like Joshua wrote in a recent article (paraphrased), this lack of understanding is partially why it’s relatively easy to get rich in this country.

    • http://www.joshuakennon.com/ Joshua Kennon

      You just brought up one my favorite truths in the stock market: For every share sold, there MUST be another buyer on the other side of that transaction!

      People forget that. It’s common sense, but you even see it in the newspaper, when reporters talk about investors “selling off their stocks”. Even I use it from time to time because it gets the point across, but it’s not entirely accurate. There are no net sales or net buys. Every transaction is balanced between a buyer and a seller. That price gets shifted as one side outweighs the other, but the overall transaction cannot take place without two sides to the table.

      You’re right that someone who swears off home ownership will not change their mind most of the time. There are people who get stuck in these loops – “never own a home” or “always buy a home” – “never own gold” or “always buy gold” – and forget that the real question is Benjamin Graham’s two-part test: “At what price, and on what terms?”

  • http://www.joshuakennon.com/ Joshua Kennon

    What a wonderful comment! You made my day with this.

    Reading through it, here were my thoughts as they occurred to me:

    1. I wouldn’t have “begun” thinking about selling the bank stocks at 33x current earnings, I would have sold them already. Even if they went to 100x earnings, that wouldn’t bother me in retrospect because that isn’t investing. It’s a form of speculation I don’t play. I am not so much interested in making money off the mistakes of others as I am in owning assets and profiting from their underlying contribution to the economy. Not only does this leave me in the safer place of always being able to resort to the intrinsic value utility of the cash it generates, it is also morally superior because you deserve every dollar you earn.

    2. By 1928 and 1929, the economy itself was good, the valuations of public securities were bad. I would have taken my money directly to the assets themselves by seeking out ownership of things that produced the money directly, like buying oil wells since, as you pointed out the prices had already dropped. Or, maybe, I’d begin running a retail shop (my skill set includes being a good operator – going back generation after generation, there are business owners in it). During the Great Depression, one of my great grandfathers owned the entire side of the highway in a town in Missouri, where he had a gas station.

    If banking were really that large of a growth business, I wouldn’t be buying banking stocks at 33x earnings. I’d start a bank. As in, I’d have gotten a charter, gone to other people, found a town that needed banking services, and opened a bank so I was able to invest at 1x book value.

    3. If friends and family want my opinion on financial matters, they have me control the money. Half the time, they don’t even know what they own. I explain the philosophy of what I do but the ultimate decisions are mine and mine alone, otherwise, they aren’t going to get much discussion out of it from me. The reason is simple: If I’m correct, not only will I have not been compensated for doing the work, but they will somehow convince themselves that it was their idea. If I am incorrect, they will blame me and build up resentment. There is no positive contribution to utility for me here, but plenty of costs so I never allow myself to enter a situation where that can happen.

    4. I’d never own steel stocks except under extraordinary circumstances, which weren’t even close to happening in the 1920’s. They look cheap but the maintenance capital expenditures are so large that the “owner earnings” are much smaller than the reported net income. It’s an illusion. There is no profit there, which was clear by the fact that the companies had only raised dividends once in a decade or two. A steel mill at 12x normal earnings is as bad as a bank at 30x normal earnings.

    Now, the oil stocks … the oil stocks would have interested me. So would the tobacco stocks. The ability to pay out 90% of your earnings in cash dividends, require very little capital to operate, very lucrative profit margins, and you could see per capita smoking rates going up all around you since the cigarette companies gave our free cartons during World War I? Some of the food stocks weren’t that bad, either, but that was a situation-by-situation thing.

    5. You said: “Never before you feel so stressed up by a world laughing at you. Self-doubt begins creeping in. You began questioning yourself.”

    My first thought: Never happen. I know myself. Nope. Impossible.

    Perhaps it’s my psychology profile, but I feel a lot like one of my late mentors, who said, “I would rather be right than loved.” Selling a stock at 30x earnings that goes to 200x earnings is not a bad decision. It just means people have lost their minds more than you expected. That happens. It would not cost me a moment of sleep or cause any self-doubt. A majority of certain populations would take their newborn infants and sacrifice them to imaginary wizards in the sky for a good harvest. A majority of certain populations would enslave other races, beat them, rape them, and teach their kids to do the same. Independent thinking is hit on as a theme in this site so often because it is your highest moral responsibility. That extends to your finances.

    And if everyone kept saying, “The bank stocks keep going up, Joshua! They’re at 80x earnings now!” My only response would be, ‘We’ll see …” and leave it at that.

    6. You said: “You were receiving calls from your friends and extended family for private loans for them to cover their margin gaps caused by their recent losses. They were crying to you. “ I can’t afford to sell now, Joshua, I would have lost all the money I made and maybe some losses too. All I can do now is to hope that the markets recovers a bit, and maybe I can breakeven. Joshua, please lend me some money so that I can buy more. Didn’t you tell me that cost averaging is good for me?” Would you lend money to them?”

    No! Hell no. Never going to happen. You never throw good money after bad. I’d let them get liquidated and, in some cases, watch them go bankrupt. This is a no brainer.

    7. You said: “Even more people are asking you and your family to lend money to them to survive and live. Can you just close your eyes and say no?”

    It depends on the circumstances. If they had been making allocation decisions that were based on such faulty valuations, I’d never give them a dime. If they lost everything, I’d let them live in my home for six months. I’d feed them while they got back on their feet. I’d help them find work or start over with a business idea. I’d let them borrow my car to get around town or go to interviews. But I’d never write them a check. I’m not going to spend years decrying the price of banking shares and then have them expect me to bail them out when they ignore what I said. I am not someone’s piggy bank, nor am I their solution. I will be almost unlimitedly generous with my knowledge, and help catch them when they fall, but if I do the work, it will never really be your accomplishment.

    Part of this is that I come from an enormous family on both sides and I’ve seen what drug addiction, gambling, credit card debt accumulation, etc., can do. More money never solves it. It kicks the can down the road.

    So, no. I would not lend them money. I’d let them lose everything.

    Now, if the situation were different – let’s say they were a great capital allocator, had a wonderful track record, were rational about money, and some completely black-swan event occurred that threatened their solvency, I might step in with a solution if it were within my power to do it and it didn’t risk my own family or business welfare. For example, if I had a family member who owned a retail store that was very successful, and who had a bunch of illiquid assets like timber rights, but they suddenly were hit with a huge cash need that threatened the business in the middle of a depression because three of their biggest customers failed and owed them large balances, that’s a different situation. I’d probably infuse a bunch of money into the business as preferred stock or bonds to get them through and let them rebuild without getting wiped out entirely. That is not even remotely a comparable situation, in my mind.


      Your the first investment pro I notice with good principles. Most are dominated by an excessive compulsive desire called greed and a high level of selfishness.

      I enjoy your thoughts Joshua.


      Dr. Atwater

  • http://www.joshuakennon.com/ Joshua Kennon

    P.S. This is why I should point out that I am so adamant that a significant portion of your cash earnings power should come from assets outside of the securities markets. If all of your net worth was in the stock market, you couldn’t have taken advantage of the falling prices to the same degree as you could if you owned a debt-free business that was still pumping out some earnings in the darkest days of 1933. You could have taken that cash, thrown darts at the stock listings in the newspaper, and become very rich over the subsequent 25 years. You must have an outside cash generator or a wholly owned asset that produces money – in cash – that you control.

    • Mark

      Most “businesses that you could control” were also substantially/significantly impaired. However, if you owned those firms spinning off 8% dividends, one could have re-invested those dividends and purchased a significant amount of additional shares at the bottom. Of course, owning inversely correlated assets, such as the gold shares, would have allowed one to acquire distressed firms inexpensively as well.