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.
Before 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.
Reader Comments (11)
Comments are presented chronologically, with replies indented beneath the comments to which they respond.
lokgp
March 13, 2013
So, Joshua, let's walk back in time together:
Let's imagine it is back in 1928:
Stocks are at crazy levels. Most of the banking, consumer, manufacturing, utilities stocks are around 25 times earnings. With the banking stocks rising rapidly. Most of your friends are pouring into the stock market, piling on margins and laughing to the bank. You were invited to lavish dinners by your mates, but you still had to pay for it. Your neighbour just bought the latest Cadilac Fleetwood, and your friends are discarding their Chevrolet, upgrading to the latest model of Buick. Stock tips are around. Stories of how Baruch is cornering the market with its latest takeover of the smaller banks. Your extended cousin is about to take on a honeymoon trip to the Great Britain on White Star Liner's largest and grandest ship, the "SS Majestic". Your previous university classmate was just showing off his newly purchased and beautiful “Rolex Oyster Perpectual” the first self-winding watch from Rolex.
And you were looking around you at the word, saying “All this is simply just wonderful.”, while looking at 20 years treasury bond yields at 3.2%
As the Dow Jones Industrial Index continue announcing record breaking new highs, banking stocks reached 33 times current year earnings, you begin wondering whether it is time to sell off your bank stocks and buy some oil and steel stocks instead.
And by Disember 1928 just a few days to Christmas, banking stocks just reach 35 times earnings, and you thought to yourself, “Time to sell the bank stocks and get into the old oil and steel stocks.” But you have your reservations. The steel stocks were highly leveraged ever since JP Morgan bought them over. Dividends were at 3.2%. Perhaps you should have bought their bonds instead. Everything is just so expensive. Standard Oil seems a lot more cheaper, maybe you should sell the utilities and buy the oil stocks instead. But there is this constanly falling oil price. Will this continue. Simply too many uncertainties. Day and night you seek out information on the oil stocks to give you a more informed view on the future oil. Pondering and wondering. Rail road stocks looks alright, but not great. Mostly are highly leveraged with most of them at 40% debt. Dividend income is a constant. The latest bond offering by one of the rails were undersubscribed. There does not seem to be too many great choices. You worked on seeking the most efficient oil producer, selling all your banking stocks, moving more of your funds into tobacco stocks and other staples.Taking 10% of your funds into some high quaility corporate bonds.
By March 1929:
You felt that enough is enough. You were getting sneers from your peers and family for selling away your banking stocks. The banking stocks were making new highs nearly every week. No matter how you explained that it was a rational decision, you were still getting doubts. “Look at my friend, John, he just held on to its banking stocks. He said its going to split from 120 to 30 soon, and when it split to 30, it will rise very quckly back to 120.”
“No more buts Joshua, the current price tells me you are wrong in selling ‘em banks. That is a fact. They had kept on increasing.” “Look how much you made us loss when you told us to sell. If this keeps on going up, I’m gonna buy back what I sold, if not more.”, said one your friends.
Never before you feel so stressed up by a world laughing at you. Self-doubt begins creeping in. You began questioning yourself. Is it really different this time? You wonder whether you can continue remain sane. Maybe you should buy gold. It is selling for $20.60 for the past 3 years. Very stable prices. But no dividends, no income. What if the world will go on for the next 10 years at such high valuation instead? What if this is the new norm?
You proposed to your family members to sell most of their stocks, and have 70% into bonds. And they looked at you in puzzlement. Times had never been better than now, and you wanted us to sell. Alright, let’s just listen to Joshua. But what bonds to buy? 20 year Treasury bonds are at 3.5% There are some other corporate bonds paying out 5% coupons. Bond prices flutuates too. What if bond prices fall? What if interest rates rises? Some bonds are selling above par, and some below. Bond trading commision is at 0.25%. What should I buy Joshua? What about Fixed Deposit in banks instead, Joshua?
By September 1929:
Stock prices were falling. Your friends were saying, “Why can’t Joshua just tell us some good news.” “Argh, he just wants to see us lose money. I can’t afford to sell now, I just top up another 30% in margin.”
By November 1929:
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?
“Enough of your doomsday call. The market can only recover from this low. This must be the bottom.”
By June 1930:
You were getting dire calls from your friends and extended family and relatives. Business are doing poorly. Many of them unemployed. They had great losses and tremendous debt from their margin calls. 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?
Alright Joshua, I think we walked enough back in time. Let’s come back to the present. I have slotted some questions in as you can tell. And maybe these questions can be discussed and your viewpoint can be shared in multiple posts. And also, maybe you can discuss what you would have done instead, allocating capital wise, family wise, perception wise, communication wise, emotionally control.
The bond yield and prices pdf document has been very useful. Thanks for sharing it out.
Tricia Drake
March 13, 2013
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
March 13, 2013
Replying to Tricia Drake
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.
Joshua Kennon
March 13, 2013
Replying to Tricia Drake
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?"
Joshua Kennon
March 13, 2013
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.
lokgp
March 13, 2013
Replying to Joshua Kennon
I think through this last night and was reading more from this site. I did noticed that maybe I could have own a local business instead which will still generate reasonable return. And also, I forgot that you can just have held cash instead. Cash is a call option on every other classes of assets. I guess it is a must to be an operator. This is really something to think about. In my mind, being an operator takes a lot more commitment than just being a shareholder. If my funds are small, I might not be able to buy over an existing business and have a management team run it. Akin to Buffett's See's Candies. See's was a smaller company back then, but probably far bigger than most people can afford. They would have to go into business themselves. Something to think about - very seriously.
Joshua, thanks for sharing your thoughts. Appreciated.
ALFREDO A ATWATER
April 14, 2013
Replying to Joshua Kennon
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.
Thanks,
Dr. Atwater
Joshua Kennon
March 13, 2013
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
September 11, 2014
Replying to Joshua Kennon
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.
t
June 22, 2017
Interesting info. But how often do those kind of bargains occur widespread. 3 or 5 years per 100. maybe. Also, do you really beleive 8o or 90 year old statements of book value. Also, accounting standards then vs. Now. Im not sure if those days are comparable. Ps i grabbed shares of at t gen mills coke exxon etc...not sure its worth waiting for ww3.
t
June 22, 2017
Theres more.. example...
at and t 1933 vs. At and t 2017
Are they even comparable?
Also, what were income taxes then 1930s vs. Now..
Did the sec exist.? Were the reported assetts real to arive at book value? Were assets in 1930s overstated.
Info tech...how could a regular person even determine what any stock was worth. Its amazing what you can find online these days.
Cost of broker to purchase shares in 1930s.. its free now if using funds.
My god we have pizza delivery now, didnt small pox still exist then.
Life could be easier now...do we deserve exxon shares yeilding a 25% fixed coupon at par like 1920 or whenever it was.?
Also, walmart for example, had 485 something billion sales last year..im not sure that the 1930s are comparable as a sales figure for a discount store. Things may be different now.
Td bank had over a trillion assets last year.
how is that comparable to 1930s?
I mean sure some day the fed will make a mess again but being too frugal can also get you in trouble if your picking up half smoked drool covered cigar butts.
Quality counts too. Make sure its in the green ink.
However, amazon today looks like cisco did in 1999. And cisco looked like...1929 in 1999.
I wont touch that.
But 20x earnings is reasonable over the past 20 years...to own indexes.
I think its fair to pay more under circumstance anyhow.
I mean a utillities assets net 3% or so...roa....buy the stock for less than the assett and assume the liability... your not going to get a 3.5% lending rate to build a nuclear reactor in your yard.. might as well own the stock if market cap is less than stated assett, ...the grid running well enough, steady customers, management in place..3.8% div yeild seemed fair enough in 2015 To own utillity index.
And so i did.
breadlines...dont wish for breadlines.
Definatly dont want ww3.
Its good for everyone when market cap is reasonably high. reasonably. Not too high priced..but Corps can obtain finance. Think utillity, electricity is priced at operating costs plus rate base. More or less. New shares issued can finance grids. Low interest is cheaper capital reflected in lower cost electricity for homes and businesses. If market cap declines, and credit cost increades its harder to finance grid upkeep and that will show up in monthly bill.
Well capitalized utillities can lower electric costs for industries.
about sp 500
pe 20x...
5% and some growth can pay bills..pe 20 is ok.
Is cheaper really better? Really.
Crashes are uncomfortable and a fact of life like menstruation.
Cash yeild and junk credit default cannot pay bills.
Even private equity can sell at 5x ebitda.. add it all up even private equity generally yeilds similar returns to sp 500 in general... compaire (dov) 2015 to private equity.. Privately, we had falling revenues and no serious intangibles except an orvis patent on a fly reel...5x sold.
Its goodwill to pair fairly to own stuff. Karma.
I think it bad karma to be too cheap. One hand washes the other.
A gallon of fuel was $2.3 today. Im still not going to back up the truck it will turn to jell.
Cars get 30 mpg now. What did an auto in 1930 get? Non comparable. Buggywhips still existed.
Housing..landlording yeilds 2.5% to 5 % gross , locally...revenue minus property tax minus maintenance minus dep..minus lost rents..just like a reit...
Landlording isnt beating reit index.
From time to time property gets cheap, other times its not. Id rather own a 20 year bond and scrape gains or lower my basis. But i just wouldnt expect assets to yeild much more before id wonder what was wrong.
Average housing prices
1980 to$ 3.1 min wage
2017 $7.25 min wage
Housing inflation roughly in line w wages.
Not a problem. Rent average is fair.
Coca cola, budweiser 50 c per can!
2017.
Hershey bars 79c
Lays 50c
Dozen eggs $1.19
Cheap! Im getting fat.
Would that kind of walmart like every day low pricing and supply increase be possible if market
Caps deflated and lending costs were high...i think higher rates would reduce commodity supply and cause inflation. I think deflated caps would also be problematic for obtaining capital in corporations.
I have to buy stocks and credit daily. Its my job. But i often wonder....
Here is my personal algo.
Sit on cash and dont get paid..
Or
Lend To walmart and tighten belt
Or
Buy public dividend paying shares wear crash helmit
Or
go private.
Now...
4 out of 5 private enterprise start ups fail
F that!
China yeild curve is inverted now, ugh oh. Wheres my crash helmit.
Therefore, lend to walmart till 2019 ish.
Cash yeilds nothing.
The 30 year treasuries are up 10% past 6 months.
The curve is flatened more.
Hope my rant helps.