There is one great mystery worthy of comment; and that is, how such a tremendous scaling down in values could have been accomplished in so short a time without bankrupting a single one of the major banks or brokerage firms. The answer must be that the public stood the loss—as it usually does. And why not? They had every chance in the world to get out with fabulous profits. For more than a year they had the advice, warning and threats of the Federal Reserve Board displayed on the pages of all the newspapers, and dinned into their ears. But whenever these warnings or any other danger signal appeared, the market manipulators showed their contempt by promptly pushing prices up a few more points. They defied and scoffed at every principle of common sense and business economics, and they got away with it so long and successfully that it seemed they were bound by no laws or limitations except those of their own devising. For years the market was under the dominion of a new generation of dare-devil cliques who manipulated it with an iron arm more daring and more dogmatic than the rule of any tyrant in history; and month after month the cool-headed non-participants read the financial pages with gaping amazement. If the weekly bank statement showed that brokers’ loans had increased a hundred millions or more beyond expectations, it was the signal for a new outburst of bullish enthusiasm; if the interest rates were advanced or even doubled, millions of shares were immediately churned back and forth at advancing prices, in order to prove that the laws of gravity and economics had become subservient to the will of the speculative mob. It happened repeatedly that after some large corporation had issued an unexpectedly poor earnings statement, the stock of that company was immediately taken in hand and forced up several points, on the argument that the “bad news is all out,” and had already been fully discounted. And on the theory that a storm-tossed ship is more apt to sink if standing still than if running under full steam, the market was pushed ahead at breakneck speed with compass and rudder in the hands of a reckless crew that paid no heed whatever to reefs or shoals.
The Federal Reserve System, instead of being responsible for the crash, was the one agency that saved the whole community, including the banks and brokers, from complete financial chaos by furnishing at the critical moment an abundance of money and credit at low rates.
The theory advanced by some of the economists that the trading public merely lost their paper profits, and practically nothing else was either gained or lost in the tremendous rise and fall of stocks, is a little misleading. One authority says: “For the shrinkage of thirty-five or forty billions of dollars in stock exchange securities nobody is any poorer but on account of things possessed and consumed too soon.” Assuming that the market started at a given point in 1924 and reacted to that point in 1929, it would mean a loss of many hundreds of millions in commissions and interest. It is estimated that in 1929 alone the commissions for transactions on the two “Big Boards” amounted to well upward of five hundred million dollars. Most of the margin traders lost all of their original investment, and many of them all they could borrow on their notes, their life insurance policies, and even their homes.
All this by way of retrospect. The vital question that confronts us is: will traders and investors profit by the experience? Apparently not. The survivors of the late catastrophe promptly formed a “wrecking crew,” and are at the present moment busily engaged in rebuilding the market structure on pretty much the same lines as before. The rumor band has been reorganized and is piping its old-time music into the ears of all listeners. The tipsters are also lined up, and with the cheery cry that the storm is all over they are wheedling and coaxing the public to come out of the storm cellars and get aboard the reconstruction train. They harp persistently on the fact that stocks are cheap,—not because of their dividend return, but because they are selling much below the boom prices. Their calculations are drawn mostly from figures at the big end of the measuring tape. Improved business—which exists more in the imagination than in fact—is employed as a smoke screen to hide the fact that the great majority of the active stocks are still selling far above a reasonable investment basis. At their present prices ten of the best known representative common stocks,—U. S. Steel, General Electric, Westinghouse Electric, Atchison, American Tobacco, Radio, Consolidated Gas, American & Foreign Power, Columbia Gas and Johns-Manville, pay an average return of two and nine-tenths per cent. In other words, at going prices if you bought one share each of these ten stocks the total cost would be $1425 on which you would receive an annual dividend of $41.60, or less than the return on U. S. Government bonds. It is therefore clear that a bull market constructed on this basis must be a highly speculative affair.
In February, 1930, the financial editor of the New York Herald Tribune printed the following comment:—
“The upward pace of the stock market leads one to believe that the financial district is up to its old trick of discounting in advance the recovery of business from the trough it now finds itself in. To the observation that it is going too fast, one can only agree, and add: ‘It always does.’”
The old split-up, consolidation and stock-dividend chestnuts are being industriously warmed over and the few scattering traders who saved something out of the recent smash are beginning to nibble at the bait. All of which shows that people are quick to forget their stock market troubles and to return for more punishment. I make this observation in the light of many painful recollections of earlier days.
The grist of stocks issued in the recent past is almost incalculable. There are now six industrial companies with an aggregate capital of 171,927,540 shares outstanding; and from the side lines it looks as if there ought to be time enough to start another boom when the stock market gets over its present case of indigestion.
In the final analysis the following essentials should be constantly borne in mind: The stock and grain markets are always capable of playing new tricks on you—of doing things you never dreamed of. Who, for example, could have imagined that with a world shortage of wheat, that staple commodity would be selling in February at considerably under ninety cents a bushel—nearly as low as corn!
Another important thing always to remember is, not to buy more stocks than you can pay for, or margin far below the lowest point you think they can possibly reach. The extra profits to be derived from over-trading are scarcely ever worth the risk incurred.