This month marks the 72nd anniversary of the most cataclysmic economic event of the 20th century: the 1929 stock market crash. In his recent book "The Great Myths of 1929 and the Lessons to Be Learned" (Greenwood Press), economist Harold Bierman Jr., a professor of business administration at Cornell's Johnson Graduate School of Management, takes issue with some of the major myths that have grown up around the crash and tells us how today's investors can adjust their thinking to avoid a recurrence.
The most persistent misconception concerning the 1929 crash, says Bierman, is that stocks had become extremely overpriced due to excessive speculation before they fell."In fact, the extraordinary rise in stock prices from 1925 to 1929 could have been justified by the extraordinary performance of the nation's economy and of the companies whose stocks had risen. From 1921 to 1929, industrial production in the United States nearly doubled, while our national income increased from $59.4 billion to $87.2 billion. By most standards of measure, stocks were fairly priced relative to these figures."
Another canard concerning the crash, according to Bierman, is that it occurred only after a handful of manipulators had driven up stock prices.
"The crash was more the result of the misjudgments and bad decisions of good people than the evil actions of a few profiteers. In fact, the amount of stock manipulation that took place during all of the 1920s was surprisingly small."
Bierman also disputes the persistent belief that a high level of margin buying sabotaged stocks and that the credit extended to Wall Street brokers kept similar amounts of credit from making its way into the general economy.
"This widely accepted belief has never been proved and today cannot be taken seriously as an important factor in the decline. In fact, the actions of the Federal Reserve Board to bring down stock prices eventually jeopardized the nation's prosperity in ways that few had predicted."
Bierman concludes his book with a number of lessons to be drawn from the events of that long-distant October. Among the most relevant for today's investors:
1. The balance between stock market optimism and pessimism is very delicate. In 1929 the prevailing optimism began to be eroded by the negative statements of government agencies and public commentators concerning excessive speculation.
2. There will always be a problem with mob psychology in any market. Shifting investor sentiment is catching, and there can easily be a snowball effect.
3. Even the best minds can be wrong in their predictions for the stock market. Both Irving Fisher and John Maynard Keynes made very optimistic prognostications for stocks in the fall of 1929.
4. The attempt to use the money supply to control the stock market can affect real business activity in ways that can't be anticipated.
5. The period after 1929 proved there can be long stretches of time when common stocks are viewed as undesirable holdings. This is a strong argument for an ongoing policy of investment diversification.
(Investor's Notebook reflects the opinions of professionals. It does not recommend any specific investments, and no endorsement is implied or should be inferred. For more information, contact the individual firms cited.)
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