A recent Wall Street Journal article by columnist Jason Zweig dispels myths regarding history’s market crashes and offers insights regarding how they relate to today’s market and to a “buy-and-hold” strategy.
Zweig writes, “Everybody ‘knows’ the market collapsed in 1929 because euphoric speculators bingeing on borrowed money drove stocks to absurd heights. That isn’t true.” Although at the time some stocks were expensive, Zweig points out that most weren’t. “Many major companies traded at 14 to 19 times earnings around the market’s peak in September 1929. Profits were growing far faster than stock prices.”
Zweig argues that the reasons for the 1929 crash are still largely a mystery but suggests that the most probably cause was the Fed’s tight monetary policy at the time. He adds, “but why stocks collapsed in late October 1929 when rated had been rising since 1927 nobody can say.”
As far as takeaways for today’s investors, Zweig writes, “No one who lived through the crash of 1929 would agree with the view, advanced in the late 1990s, that stock become riskless if you hold them long enough. Investors should always regard the stock market as sailors regard the sea—a means to an end, usually benign, but potentially lethal. Catastrophic losses are rare, but their risk never goes away.”
He concludes: “To be a long-term investor in stocks, you have to be prepared to lose more money for longer than seems possible. Anyone who takes that risk lightly is likely to sell out, in the next crash, near the bottom.”