The 1929 Stock Market Crash – Let’s Not Do That Again!
The Roaring Twenties were a celebratory and prosperous time; after World War I, citizens enjoyed the peaceful time and reveled in new technologies such as the radio and the automobile. People were able to travel far and wide with the increased availability of airplane flights.
As the stock market began its upward climb, everyone and their brother wanted to hop on board. The widely-held opinion was that the stock market would always go up; most investors in that day simply didn’t understand the volatility and risk involved. It seemed like such a safe bet that people actually began pouring their life savings into the market, mortgaging their homes to buy up “hot stocks”.
One factor that seemed an incredible help to investors at the time, but which actually intensified the eventual devastation, was the fact that stock holders could purchase on the margin. To buy on the margin means to borrow stock in order to gain leverage. This strategy worked well when the market was up; for every dollar they purchased, an investor would borrow another nine dollars worth. If the stock went up 1%, they would make 10%. It sounded like a foolproof, lazy way to get rich, and many did! In the period from 1921 to 1929, as the Dow Jones shot up from 60 to 400, ordinary people became millionaires and began the trend of living beyond their means.
The downside to buying on the margin is that the same principles apply when the market goes down. An investor with a stock that had dropped 1% would actually lose 10% because they owed for the borrowed stock. This made even the smallest losses seem unbearably huge. And as people began to realize just how over-inflated the market was, the inevitable mass sell-off began. Thursday, October 24th, 1929 kicked off the devastating crash as investors panicked and tried to sell off all of their stock.
On October 28th and 29th, the bubble burst and millionaires were bankrupted in an instant. Average Joe’s who had invested everything lost it all in one fell swoop. The Dow Jones hit just 145 by November 1929 and the Great Depression began. Another factor that contributed to the overall devastation felt by all was that the banks had invested heavily in the market and lost their customers money. Even though who had avoided the stock market in favor of safer savings investments were touched.
After years of good times and good living, most stock market investors spent the next decade in complete and utter poverty. Although the stock market crash of 1929 is certainly one of the more dramatic and intense examples of what can happen when the financial bubble bursts, it is a warning to investors not to flood the stock market with excitement and emotional purchases. Had the investors of the day studied the companies they were investing in, they would have realized just how ridiculous the market was compared to the actual value of the companies.