The Great Depression: A Diary

Depression diary

This is an excellent book from a lawyer in Youngstown, Ohio during the Great Depression. It is presented in diary style similar to Part 2 of George Soros, The Alchemy of Finance. It begins about a year after the stock market crash of 1929 and continues to the middle of World War 2. Each paragraph is an entry on a specific date and the reader follows with Mr Roth as he describes the mood, the stock prices, the politics, on a month to month basis. We can see Mr Roth grow more competent in the fields of politics and economics as the years pass and it reads excitedly as we approach the war years. Additionally, Mr Roth made various predictions and then came back later into his diary to see how his initial prediction played out through is annotations. There are interesting interviews with the people of Youngstown and some of their unfortunate outcomes in speculating during those times. He also came to many important conclusions about the stock market:

1) Most predictions are worthless, especially by pundits

2) Buy stocks below intrinsic value, sell them above.

3) Patience and cash is king. Buy during a depression. Many people KNEW stocks were a good buy they simply couldn’t because of lack of capital or those that did hoarded or saved their capital for fear of continued or prolonged lean years. “Not 1 man in a million succeeded in doing this and that is why the millionaire club is still exclusive” [I am reminded of Seth Klarman being mostly in cash right now.]

4) Cycles seem to come to play and many of his predictions that turned out correctly are a mix of cycles and sentiment.

5) Opportunities exist in re-organized equity and distressed equity.

6) Do not speculate but invest for the long term and have your money work for you. Invest in the best stocks at good prices and hold until the crowd is giddy. “Difficulty diminishes with distance”

Some other interesting tidbits from the book regarding government stimulus:

Did you know the Federal Reserve already tried QE? The Federal Reserve bot government bonds to supply capital to the banking system but surprise, they simply hoarded it.

“when business starts moving, credit will expand automatically but artificial creation of credit will not expand business.”

Interest rates were around 2% yet dividend yields on equities were 5%-6%

He seems enamored with government debts and the threat to inflation though it never came to pass during the time of the book. There is constant mention of inflation or the threat thereof in this book.

The result of the government stimulus? A momentary boom period from about 1933 to 1937 which subsequently re-traced. The years of 1937 till the start of the war in 1939 are described almost as bad as the years after the crash. The New Deal economics instituted many programs that in essence, gave money directly to labor along with a huge windfall when World War 1 pay was released that caused a momentary burst in the economy. When these programs were ended or taxed the effects wore off. In September of 1940 the Selective Training and Service Act (DRAFT) went into effect, numerous men were turned away due to malnutrition and the nation still had 15% unemployment!

stock chart depression

During the 1938 recession, stocks broke FIRST, Mr Roth noticed that the stock market broke lower without any fundamental news. His empirical observation was that stores were full and people were mostly optimistic. It wasn’t until a few months when the fundamentals and the overall economy caught up to price action. It caught almost everyone off guard.

When the War was in it’s early stages and the US was supplying arms to Britain and the Allies, industrial production was up, corporate earnings were up, but despite an initial bounce off lows stocks were flat. In fact, business was so slow, NYSE seats were sold at record low prices. This persisted for a few years till America formally entered the War and it looked clear the Allies would win. Subsequently there was a large post-war rally. 

It wasn’t until government spending on the War effort did government spending actually rectify the economic malaise. Government and big-business were forced to come together. Business leaders were asked to join government organizations and a symbiotic relationship was developed. Only then did stimulus spending “work”. Interesting food for thought.

Finally, while this blog and my day job is dedicated to shorter term trading, I have been actively trying to learn and apply Value investing principles that Mr Roth described in my personal account. For those that don’t know I’ve started a more value oriented idea blog here.


~ by largecaptrader on April 26, 2014.

One Response to “The Great Depression: A Diary”

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