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.
