THE 800-POUND “D” WORD IN THE ROOM

[Crewleader]

By Frank Kaiser

"Capitalism is the extraordinary belief that the nastiest of men,
for the nastiest of reasons, will somehow work for the
benefit of us all." - John Maynard Keynes

WHEN THE STOCK MARKET CRASHED IN 1929, my mother worked as a teller at the Park Ridge (Illinois) State Bank.

"Best job I ever had," she used to tell me.

She loved dealing with customers. Knew them all by name and many by what they were saving for in those pre-credit card days.

The crash and eventual erosion of consumer confidence changed everything. With incomes falling, companies and jobs failing, debtors defaulted, leaving banks like my mom's with no cash.

Park Ridge State Bank



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[selador]

1. and yet

if you dollar cost averaged (the most basic investment style for the average retail investor.) during the great depression, you still would have made out well

there has NEVER been a 20 yr period in the history of the US stock market where that was not a positive expectancy strategy. in most 20 yr periods it beats the majority of other asset classes.

my grandfather, who lived through it gave me a very smart piece of advice about investing. don't worry about the short term machinations. build wealth over the longterm by DCA'ing EVERY month

i've done that since i was 18.

overleveraged spec's (who don't manage risk) get crushed in ANY market - stocks, real estate, oil, etc.

i later graduated to short term price speculation (as a trader) but have maintained the steadfast philosophy (in invesmtnet accounts) of DCA'ing.

we could see FARmore selling, but in the long run - capitalism builds wealth, and the markte is its best proxy

[Warpy]

2. My grandmother got through the Great Depression

as a divorced woman with a kid by eating oatmeal 3 times a day for a couple of years, but about a third of the stocks she owned outright did well enough that they were able to keep their home and not take in boarders. Stocks did very poorly for about three years and didn't recover fully for another twenty, but they did recover.

It's just a tough proposition for us old crocks to confront, knowing we don't have that twenty years to wait for stocks to recover.

However, selling the stocks now and stuffing the boodle into a mattress isn't a good idea, either, when one thinks of thieves and house fires plus losing all the income that a decent portfolio produces. That income sustained my mother and grandmother.

The stockholders who got killed in the Great Depression were those who had bought stocks on margin, meaning they only owned about 4% of the face value. At the beginning of the crash they sold everything else in a vain attempt to keep the stock and ended up being wiped out. Likely it will be the same now. Banks and brokerages are already scrambling to shore up their assets to make up for all the bad debts they took on in the form of structured assets vehicles and other exotic assets. Some will survive and some will not.

If you want to know where the "Big D" comes from, follow the debt and how deregulation allowed it to infect assets columns on balance sheets for both families and corporations.

[selador]

3. excellent post. some thoughts...

"as a divorced woman with a kid by eating oatmeal 3 times a day for a couple of years, but about a third of the stocks she owned outright did well enough that they were able to keep their home and not take in boarders. Stocks did very poorly for about three years and didn't recover fully for another twenty, but they did recover."

correct. the thing about DCA'ing is that since you are buying the same notional value (cash value) each month, you naturally buy nmore shares when price is down, and less when it is up. this strategy worked reasonably well even through the 1929 selloff and the great depression because it gives a decent averge price over the longterm. retail investors TEND to want to buy tops (when euphoria is hi) and sell bottoms (when the world looks to be coming to an end).

smart traders CAN play price momentum (buying strength) which i do but you have to be rock solid disciplined on stop loss orders, NOT overleveragfe, and its a talent. not for a part timer

"It's just a tough proposition for us old crocks to confront, knowing we don't have that twenty years to wait for stocks to recover."

absolutely. that's why as your time window gets shorter and shorter, you should be less exposed to stocks in general (as a percentage of your total assets) and also even consider more hedges (shorts) and other protections.

for those who don't want to sell (for tax purposes) they can always sell covered calls on their longs and buy protective puts for example (so called free puts) to lock in prices.

"The stockholders who got killed in the Great Depression were those who had bought stocks on margin, meaning they only owned about 4% of the face value. At the beginning of the crash they sold everything else in a vain attempt to keep the stock and ended up being wiped out. Likely it will be the same now. Banks and brokerages are already scrambling to shore up their assets to make up for all the bad debts they took on in the form of structured assets vehicles and other exotic assets. Some will survive and some will not."

correct. bucket shops were offering RIDICULOUS margin. note; EXACTLY like the real estate bubble with interest only loans, no doc loans, etc.

margin is wonderful (as a trader i use it ) but also dangerous. it maginifies gains, but also magnifies losses.

great post btw.

for investors nearing retirement, i have recommended asset class diversification, targeted shorts and/or put protection, commodities exposure (although a bit overbought at this point), and currency protection

as you realize being 100% net long without a longer term time horizon is not good (from an invetment angle)

i also like older investors to have a solid core of blue chips. stocks like these do very well in selloffs. look at JNJ for instance on a relative strenght basis. even during the selloff, the strong fundamentals, dividend, and "safety" aspect kept it up

[dixiegrrrrl]

4. didja ever notice

that banks look like ...temples?
tht picture is pretty representative of small town banks all over, I think.

[fasttense]

5. The current and estimated rate of foreclosures and evictions

is over 1,000% higher then it was during the republican Great Depression. This is a different beast. Just something to think about.