The Great Stock Market Crash of 1929 was a wrenching event for investors, touching off a severe bear market that eventually sent stock prices plummeting by 89% over nearly 3 years. That crash took place in late October of 1929, and its 90th anniversary is a time to review five key lessons for investors today, as they try to prepare for the next big meltdown, according to a detailed analysis in a column in The Wall Street Journal by Jason Zweig, as outlined below.

These five takeaways are: (1) "buy and hold" long term investing does not guarantee gains, (2) paying huge premiums for growth can be risky, (3) the next crash may come unexpectedly, (4) a crash may come even if corporate profits are rising, and (5) reaching the bottom may take much longer than most experts think.

Key Takeaways

  • The Stock Market Crash of 1929 has 5 key lessons for today.
  • Buy and hold investing does not guarantee long term gains.
  • Paying heavily for growth can be risky.
  • A crash may come when it is completely unexpected.
  • A crash may occur despite rising corporate profits.
  • It may take years for stocks finally to hit bottom.

Significance for Investors

The 5 lessons are explored in more depth below.

1. Buy and hold investing is not a sure bet. Even over the course of decades, it may be a losing strategy. The Dow Jones Industrial Average (DJIA) was the most-watched stock market barometer for many years both prior to and after the 1929 crash. From its peak in Sept. 1929 to its trough in July 1932, the Dow plunged by 89%. It took just over 25 years, to Nov. 1954, for the Dow to regain its Sept. 1929 peak.

However, buy and hold investors would have been receiving dividends in the interim, so they theoretically could have recouped their losses on a total return basis some years earlier. Nonetheless, still stung by the crash, only 7% of middle class households in 1954 told a Federal Reserve survey that they preferred to invest in stocks rather than savings bonds, bank accounts, or real estate.

2. Paying big premiums for growth is risky. While the shares of many major companies had P/E ratios of about 14 to 19 times earnings at the 1929 market peak, some of the premier growth companies were much more expensive. For example, Radio Corporation of America (RCA), a high-flying tech stock in today's parlance, peaked at 73 times earnings and more than 16 times book value, valuations similar to that of Amazon.com Inc. (AMZN) today.

Additionally, in 1929 some investors were willing to pay huge fees to entrust their money to star investment managers. In this vein, a publication called The Magazine of Wall Street claimed that it was “reasonable” to pay between 150% and 200% more than a fund’s net asset value “if the past record of management indicates that it can average 20 percent or more.”

3. Crashes are often unforeseen. Few, if any, leading market watchers in 1929 anticipated a crash. An exception was economic forecaster Roger Babson, but he had been telling investors to dump stocks since 1926. In the interim, the Dow rose by about 150% to its 1929 peak.

4. A crash may come while profits are rising. In 1929, corporate profits were growing much faster than stock prices and, as noted above, the shares of many leading companies traded at reasonable valuations by historic standards. In 2019, however, many companies are reporting profit declines.

5. A crash may take years to bottom out. The Dow lost a cumulative 23% on Oct. 28 and Oct. 29, 1929, dates known as "Black Monday" and "Black Tuesday." Following fierce selloffs during the previous week, by this point the Dow was down by almost 40% from its high on Sept. 3, 1929. The most eminent market watchers of the day thought that the worst was over, but, as noted above, the bear market would persist into July 1932, with yet larger declines ahead.

Roger Babson finally turned bullish in late 1930 and by May 1931 he was advising investors to load up heavily on stocks. The Dow would plunge by about 70% from that point to its eventual trough in July 1932.

Looking Ahead

An old adage in investing is that "trees don't grow to the sky." The next bear market is inevitable, but when it starts, how long it lasts, and how deeply it plunges are all unknowns. Another inevitability is that pundits who predicted a crash will claim prescience, even if their timing was off by years. Roger Babson was an early pioneer in this regard.