"The long run is a misleading guide to current affairs.  In the long run we are all dead."
- John Maynard Keynes
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Note: Originally published October 2019.

On October 28, 1929 90 years ago today (at the time of this writing) -- the US stock market fell apart.

The market had peaked the previous month, on September 3, 1929, with the Dow Jones stock index reaching a record high of 381.

But throughout September and October, nervous investors began pulling their money out of the market. Over a three day period in late October (including Red Monday), the market lost more than 30% of its value.

Ninety years later, let’s have a look at three key insights from that historic crash:

1) Stocks are more overvalued today than they were in 1929...

Just ask any fundamental trader. Back in 1929, the price/earnings ratio of the average company trading on the NYSE was about 15.

In other words, investors were willing to pay $15 per share for every $1 of the average company’s anticipated profit.

That’s not high at all. In fact, a Price/Earnings ratio of 15 is pretty much in line with historic averages. Not cheap, but certainly not super expensive either. Coca Cola’s Price/Earnings ratio back in 1929 ranged between 15 and 18.

Today it’s 30… meaning that investors today are willing to pay roughly twice as much for each dollar of Coke’s anticipated annual earnings.

And Coke’s revenues are going in the wrong direction. In 2010, Coca Cola’s annual revenue was $35 billion. By 2018 the company’s annual revenue had fallen to less than $32 billion. More interesting… in 2010, Coca Cola generated $5.06 in profit (earnings) per share. In 2018, just $1.50.

And Coca Cola’s total equity, i.e. the ‘net worth’ of the business, was $31 billion in 2010. By 2018, equity had fallen to $19 billion.

So over the past eight years, Coca Cola has lost nearly 40% of its equity, sales are down, and per-share earnings have fallen by 70%.

Clearly the company is in far worse shape today than it was just eight years ago.

Yet Coke’s share price has nearly DOUBLED in that period.


Crazy, right?

It’s not just Coca Cola either; the Price/Earnings ratio of the typical company today is about 50% higher than historic averages.

(This means that the stock market would have to drop by 50% for these ratios to return to historic norms.)

So it’s clear that traders are simply willing to pay much more for every dollar of a company’s earnings and assets than just about ever before, including even right before the crash of 1929.

2) Stocks fell by nearly 90% in 1929… and it took decades to recover.

The ‘crash’ wasn’t isolated to Red Monday.

From the peak in September 1929, stocks ultimately fell nearly 90% over the next three years. The Dow bottomed out in 1932 at just 42 points.

42 is lower than where the Dow was trading in 1885… so the crash wiped out DECADES of growth.

And it took until November 1954 for the Dow to finally surpass its high from 1929.

If that were to happen today, it means the Dow would fall to just 2,700... a level it hasn’t been seen since the early 1990s. And it wouldn’t return to today’s highs until the mid 2040s.

Most people think this is impossible.

And to be fair, I think the government and central bank will do everything in their power to prevent such a severe crash.

The Federal Reserve has already announced that it will print another $60+ billion per month, which should be favorable for the stock market in the short term.

But just because we can’t imagine something happening doesn’t mean it can’t happen (or won’t).

In fact the impossible is happening right now in Japan. Japan’s stock market peaked in late 1989 with its Nikkei index reaching nearly 39,000.

Within a few years the Nikkei had lost half of its value and would ultimately fall by 80%. Even today, thirty years later, the Nikkei index is still 40% below its all-time high.


The natural direction of most regulated stock markets is up. That said, there’s no law that requires the stock market to go up. It can fall. And it can stay low for years… or even decades.

3) Adjusted for inflation, stocks have returned just 1.7% per year since 1929.

Think about that for a second… After taking inflation into account, stocks have earned less than 2% annually since 1929. As a day trader, you should hang up your mouse if you don’t consistently generate more than 2% return on your trading account per week.

Inflation

It’s true, businesses take time to grow and expand, and patient investors who understand can do quite well. But when thinking about the “long-term,” it’s imperative to consider the extraordinary effects of inflation.

Every single year your money loses around 2% of its value [aka spending power] give or take depending on the level of inflation.  This is why the super rich aren’t interested in growing their money at fast clip… rather they’re happy to simply keep up with inflation and simply maintain the spending power of their millions.

That’s also why the asset management program most investment advisors have you on is completely inappropriate for most of you. If you’re among the vast majority of people who don’t already have millions of dollars in the bank, you need growth on your money to secure your future.

But I digress… that’s a different day’s topic.

Consider that, even according to the federal government’s funny math, the US dollar has lost 94% of its value since 1929.

94%... in other words, the dollar has lost all but 6% of it’s 1929 spending power.

So even though the Dow is more than 70x higher than it was in mid-1929, when you consider the effects of inflation, stocks are only about 5x higher over the past 90 years. That works out to be an average annualized return of just 1.7%. And that’s if you owned the entire DJIA the whole time.

Ahhhhh the benefits of long term.

Even over the past 20 years-- if you go back to late 1999, the stock market has only returned about 2.2% per year when adjusted for inflation.

Long-term indeed.

A Better Suggestion

I read an enormous number of blogs, newsletters and such. One of the many that I read has a suggestion about how to do better than 2.2% per year.
“Interestingly when adjusted for inflation, GOLD has outperformed stocks over the long run.
When adjusted for inflation, gold has averaged a 1.8% return since 1929 (slightly higher than stocks), and a 6.7% return since 1999-- more than 3x as much as stocks.
But unlike stocks, people who own gold haven’t had to put up with the same risks. No shady brokers. No WeWork nonsense. No Enron scandal.
They earned 3x more than the stock market-- with the added benefit of being able to hold their investment right in their own hands.”
Can you guess what product he’s hawking of late?

I have a better suggestion… It’s 5 Simple Steps and there’s nothing to buy here…

  1. Lower your overall risk 
  2. Beg, borrow or buy a profitable simple short-term trading process 
  3. Work the process until your execution is FLAWLESS 
  4. Increase the frequency of your trades 
  5. Rinse & Repeat

Or buy the DIA and GLD and settle for less than 5% annually… over the long term.