I have drawn several conclusions from this reading. First, the late 1920s was a time of unbridled optimism and speculation was rampant. Speculators bought on margin and many of them speculated in the stock options market. The general feeling was that the economic outlook was very positive and that the stock markets could only continue to appreciate.
Reading this book, I felt a strong sense of déjà vu that took me back to the tech bubble of the late 1990s and, to some extent, the two pandemic years we just went through.
In keeping with long-time Warren Buffett associate Charlie Munger’s method of approaching situations inverted (“Invert, always invert!”), the book “The Great Crash 1929” led me to the following conclusion:
If an investor/speculator wanted to lose everything on the stock market (as many of them did in 1929 and 2000), here is what they should do:
- Aim to make the most money as quickly as possible
- Use leverage to the maximum, in particular through the use of margin;
- Favour options on securities which, thanks to their underlying leverage, make it possible to magnify quick gains;
- Focus on the most popular company securities or those most likely to make speculators dream. These securities are typically the most volatile in the markets, increasing the chance of realizing substantial and rapid gains;
- Do everything to get your hands on the securities of companies making the leap on the Stock Exchange (Initial public offerings or IPO);
- Transact quickly and as often as possible, which “free” electronic brokerage platforms greatly facilitate.
This is precisely what many speculators did in the years leading up to the crash of 1929. This is also in my opinion what was observed in the late 1990s and more recently since 2020. It is what Charlie Munger and Warren Buffet said at the recent annual meeting of Berkshire Hathaway, comparing the stock market in recent years to a “gambling parlour”.
According to Munger, the key to success in the stock market and in most walks of life is to “avoid stupidity.” Reading “The Great Crash 1929” helps identify the most stupid and dangerous stock market behaviours. It allows us to better understand what the potential devastating consequences of unbridled speculation on the part of many “investors” can be. If only for this reason, the book is worth its weight in gold.
For the investor, all that remains is to avoid stupidity.
