Sunday, April 22, 2018

Book Review (and short snippets): The Great Depression - a diary

This book  is based on diary written by Benjamin Roth, a mid 30s lawyer in Youngstown, OH and is focused mainly on 1931 to 1941 period. The unique aspect of the book is that he captures the investment environment, opinions of "experts", stock prices, and outcomes of investments from 1930s to 1960s. There are interesting case studies involving several people making investment errors and ignoring risks during the boom of 1920s. One example below shows $180K initial investment reduced to $10K.

While statistics such as "market fell down 90% during Great Depression" are thrown often around on Twitter, reading of Roth's diary makes the impact feel more "real". It moves slowly through the market crash days and shows that it wasn't a linear drop, but many mini-busts and mini-booms and many false starts. Before reading the book, I didn't know of 1937 business slow down and stock market drop.

Youngstown was one of the boom towns of the 1920s with rapid growth in steel industry, followed by steep drop in steel factory utilization and unemployment in the 1930s. This provides Roth with unique insight into the bust phase of a previously booming town. An example below about two brothers shows how people got caught into the boom of 1920s and recycled money into speculative priced assets is shown below (with disastrous results). Margin (leverage) made the results worse!

In addition to stocks, real estate investments got big losses in the Great Depressions. Examples below on houses, vacant residential lots and commercial real estate also show decades of underperformance following the crash. For houses, prices didn't rise above 1929 highs for another 25 years. Also landlords struggled with recouping their carrying costs due to depressed rents. Same for vacant lots - most didn't recoup the carrying costs. Downtown commercial real estate suffered due to flight from cities to suburbs following the WW II, GI bill and building of freeways.

Roth captures well-reasoned forecasts from various economy and market experts, only to show time and again that those forecasts were just wrong. In the end, he concludes that its best to make safe investments where price is lower than intrinsic value. And to keep cash (liquid capital) and courage to take advantage of recessions and bear markets. Roth cites example of Floyd Odlum as someone who had cash and the courage to put it to great use to buy undervalued stocks during the crisis and became one of top 10 richest tycoons in the US. This reminds me of Seth Klarman's comment that "cash is dry gunpowder" and makes me more comfortable holding higher % of assets in cash to take advantages of downturns.

This book provokes lot of thought around the central question on risk in investments: How does one protect capital? And it shows how things can go horribly wrong when risk is ignored. Sometimes, it is hard to remember this in midst of a long running bull market like today. While a crash like Great Depression might not happen again, its still useful to remember that big crashes are a possibility. And risk doesn't disappear just because its not obvious.

Additional suggested reading:

1. Howard Marks: The Most Important Thing
2. John Kenneth Galbraith: A Brief history of Financial Euphoria

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