Lessons from 1929

The year is 1929 and whether you are traveling by train, or at a convenience store, ticker tape is sure to be found, filled with the latest stock quotes. In the years leading up to Black Tuesday, stocks had finally shed their taboo of being too speculative or reserved for the idle rich. Wall Street had opened its doors, becoming accessible to the average American. So what happens when an uneducated public new to stocks meets a highly speculative market? The answer has been provided to us in our history books more than once. The build-up to the Great Depression provides investors with invaluable lessons on how to successfully navigate in the current markets. 

The 1920's led to the creation of new financial tools to navigate the stock market and through their blatant misuse, the world was primed for catastrophe. One of the most revolutionary financial innovations was using credit in the stock market. Since Americans were already purchasing cars and radios through credit, many viewed margin as merely extra money to invest. However, most did not understand the risks of stocks declining and how margin calls might lead to blown up accounts. To make matters worse the 80 - 90% of leverage Americans had access to made the eventual crash go from a healthy correction to a depression. When the market finally did crash, Americans would find themselves in financial ruin, due to poor financial planning and money management. 

When trying to understand Black Tuesday, one can see several lessons that can help protect yourself against future market crashes. With the future bull market drivers consisting of AI and biotech, its decline like 1929 will be signaled by the overly bullish sentiment of the general public. You’ll know it’s time to start thinking about exiting a trade when your friends at the office start giving you their stock picks for biotech and AI. This line of thinking helped family patriarch Joseph Kennedy protect his fortune before Black Tuesday. Specifically, the antecedent to Kennedy liquidating his portfolio was when he received stock advice from a shoeshine boy. As Kennedy put it, “when the shoeshine boys have tips, the stock market is too popular for its own good.” Unlike the late 1920s, we have access to advanced computer algorithms, which help us stay in touch with the market’s overall attitude. Rather than relying on shoeshine boys or colleagues we measure and test numerous indicators to pick tops and bottoms during major moves.