Lessons Learned From The Great Depression

I recently read a book titled, “The Great Depression – A Diary” by Benjamin Roth. It is the first-person account of a 38 year-old lawyer living in Youngstown, Ohio during The Great Depression. The book’s summary says, “After (Benjamin) began to grasp the magnitude of what had happened to American economic life, he decided to set down his impressions in his diary. This collection of those entries reveals another side of The Great Depression—one lived through by ordinary, middle-class Americans, who on a daily basis grappled with a swiftly changing economy coupled with anxiety about the unknown future.”

Much of the book’s content deals with the local and national economy, stock market, and politics, but Roth kept an eye on general investing and real estate as well. The following entry was dated September 24, 1936:

“To build an estate it is necessary first of all to get money by saving it and secondly it is most important to invest these savings so that they will increase and work for you without losing the principal. Most people learn the first rule and succeed in saving various amounts out of their earnings but very few learn the second rule – how to invest it so it earns a profit and yet not lose the principal. It follows then that it is most important to learn how to invest money and make it work for you.

‘W’ actually saved $12,000 out of his earnings. Wisely invested, he might now be financially independent. Instead he is broke. What is that one thing that leads one man to financial independence and the other to the scrap heap – when both worked hard and both saved the same amount out of their earnings? ‘W’ has a record which shows he was avaricious and was not satisfied with a fair investment return. His record also shows his investment judgement was bad whether he bought real estate or stocks. He bought vacant lots in poor neighborhoods that never developed and his equity has disappeared. Other people bought real estate and stocks at the same time and prospered. Most of those who prospered were not avaricious. It is all in the nature of the beast. It is probably just as great a sin to be too conservative as too avaricious. A man who puts his small savings in gov’t bonds at 2.5% may have $10,000 to $15,000 in his old age but he never will be wealthy.

Somewhere in between the ultra-conservative man who is afraid to take even a legitimate risk and the avaricious gambler who bets on anything – stands the ideal investor who has learned to make his money work for him. He accumulates money first by savings – then he carefully investigates and weighs a dozen investments before he finally selects one to put his money in. He is willing to take a legitimate risk but is not willing to gamble. If he invests in real estate or mortgages he first examines the property, the neighborhood, the future development and will probably have it appraised by experts. He investigates thoroughly before he buys. Such a man with ordinary business judgement will usually make a profit on his investment. Not much perhaps on each individual investment but in the end he will accumulate and as the pile grows he will find many bargains offered him because he has capital to invest.

If a man can develop investment sense he can build an estate even tho his savings from his earnings are small. It takes study and hard work like everything else but the fact remains that money can be wisely invested and can be made to work for you. The reward is well worth trying for but the dangers and pitfalls along the road are many.”

In multiple diary entries Roth discussed his belief that a wise man does not buy at the top of the market, but waits for the best opportunities to purchase when the market is rising from the bottom. It is important to not be heavily indebted so one has cash reserves available to buy undervalued, discounted assets. Roth knew there were great buying opportunities during the economic downturn, but regretted not having any money to invest himself. While he was primarily addressing undervalued stocks, real estate was often in the discussion as well. The depression brought on tremendous numbers of foreclosure auctions and there were deals for the taking. At that time few people had enough extra cash to move into a buying position, and even fewer were willing to take the risk to do so. With numerous bank closures, business failures, and concerns of the future, many Americans hid the money they did have in an effort to keep it safe. Investing it often seemed like too risky of an option. Only the brave and well-positioned could do so.

While reading the book, I found myself wondering, “Could this happen again?” The Great Recession and financial crisis of 2007-2009 seems like the closest our country’s economic conditions have come to The Great Depression, which started in 1929. But the natural cycles of a free economy often result in boom and bust periods. Plenty of experts don’t believe our country’s economy has fully recovered, and we are still on unstable ground. Some believe “massive wealth destruction” is imminent, including a “scary parallel” chart showing the similarities between today’s stock market and the market leading up to the crash of 1929, which started The Great Depression. While history is littered with claims of booms and busts that never happened, including predictions that Roth talks about in the the 1930’s, the fact remains that nobody knows for sure what will happen. With the unknown future taken into consideration, the wise investor will tread lightly and carry a big emergency fund.