The Great Depression Lesson
“Radical socialism seems rampant in every class of society but mostly ministers and college professors. This has spread to the working class. They no longer ask for favors but “demand” government work, cancellation of mortgages, reduction of debts, etc. They feel the courts will not permit foreclosure of mortgages or ejectments, etc.” ~ Benjamin Roth
I recently read The Great Depression: A Diary by Benjamin Roth. It’s a fascinating journey through the 1930’s as seen through the eyes of a common man. Day-to-day accounts and anecdotes reveal not just what was happening during this era, but how people were thinking and reacting to the decline of the nation. It’s a study of psychology, politics, economics and history.
Here are 5 things I learned from this book that can help you today.
#1. Don’t be greedy
People in the lead up to the 1929 crash thought the good times would last forever. Consequently, they exuberantly made silly and un-conservative decisions. They bought speculative stocks based on tips from friends rather than understanding the true value of a company and the stock. Borrowing on margin to buy those stocks was a relatively new idea, but since everyone “knew” the stock market boom was without end...it made sense to leverage. People didn’t save cash for a rainy day, and when that day stretched into a decade they were all in dire straits.
This is how the Greatest Generation learned about and became associated with frugality and thrift. They learned the hard way. The really, really hard way...and as a result it changed the course of history.
#2. Nobody knows what the future holds
Much of Benjamin’s diary consists of reading the news of the day and trying to predict what will happen next. Benjamin reads articles and books from the era by prominent economists who give advice and predictions...only to be revealed later in the diary (sometimes footnoted decades later) to be completely wrong.
Too many variables exist for “experts” to be accurate. That was how it was back then and that’s how it still is today. Always think for yourself and don’t get suckered into the appeal to authority argument.
#3. Treating the stock market like a casino means you’ll lose
Time after time, Roth recounts lamentations of clients that had lost everything on the stock market. They all wished that if they could do it over again they would have invested their money more conservatively. Borrowing to buy and using hearsay to make decisions was a recipe for disaster. Timing the market to buy low and sell high over and over again is a sucker’s bet. People who succeed think they succeed because of their smarts and prowess. Time eventually reveals that they simply got lucky.
The best way to invest in the stock market is steadily...in safer, bigger companies. Bonds and securities should make up a chunk of your portfolio and real estate should be nothing more than the home you live in.
This plan won’t make you rich, but it will prevent catastrophe and offer a reasonable amount of security.
#4. People have worried about government debt forever
Government debt was a worry for Roth. Every time Franklin Roosevelt dreamed up a new spending scheme, Roth was lamenting the debt incurred on the backs of future generations. I’ve heard this worry from conservatives since I was born and yet life goes on. Debt instruments, in the form of bonds, tend to provide normal citizens with good savings mechanisms. We’re just paying interest to ourselves. Foreign debt functions as an outside cash injection. The Treasury/Federal Reserve-buying-loop only risks some inflation; the Weimar hyperinflation threat never seems to materialize.
Debt levels will simply never stop rising...it’s the nature of our fiat based, fractional-reserve banking system. Responsible management is required to keep the system functioning, but doomer worries about collapse is a loser's bet.
#5. Save some cash for opportunity
Roth was broke and he wished many times that he had some reserve money to take advantage of the stock bargains. Being strapped for cash, just like everyone around him, was frustrating because he knew these times could have made him rich if he had been able to take advantage of the situation. This is a bit of a spin on the dangerous buy-low, sell-high notion, and Roth wasn’t great at predicting the tops and bottoms of the Great Depression's rollercoaster markets. Nevertheless, one should keep a decent amount of cash on hand, both to weather misfortune and to capitalize on good deals when they arrive. Be brave when others are fearful and be afraid when others are brave.
This book is a wonderful document of a tumultuous period in 20th century history. It offers a ground level view of people’s lives and thoughts in a manner that is often overlooked by big picture historians. It also serves as a good education for any reader interested in economics, investing and politics.
The more things change, the more they stay the same. Timeless lessons for a hard-learning people.