The 2009 Great Depression: Why Stocks Are The Best Pre & Post Crash Investments

If you’re like me, you keep hearing analysts and investors who insist we are in another Great Depression and that stocks will keep falling not just for weeks or months but for years.

For reasons I’ve explained before, I don’t buy it.

But what if they’re right? Let’s take a look at the potential investment ramifications.

The Great Depression of 1929

In October 1929, the stock market crashed. And it wasn’t until July 8, 1932 that the carnage finally came to an end. By then, the market value of the greatest corporations in America had declined an astonishing 89%.

Right now we’re in the midst of the second-biggest drop in the stock market in the last hundred years.

The Dow (^DJI) has lost roughly half its value since the October 2007 peak. And it may fall further still. (Trust me, the market can always fall further.) What can the Great Depression teach us at this juncture?

Well, let’s say you had the fortitude to invest in stocks at the end of 1930, after the market had fallen 50%. This was by no means the bottom. The bear still had 18 months to run. But you couldn’t have known how that bear market would end, just as you can’t possibly know how this one will end today.

But let’s say you stepped up and bought stocks at that point. Even though the economy had a full decade of depression ahead, equities:

• Delivered a return that beat inflation by 4% annually over the subsequent 10 years
• And 5% annually over the next 20.

This is after inflation, mind you, and despite the fact that the Dow had three of its worst years ever -  1931 (-53%), 1932 (-23%) and 1937 (-33%) - during that period.

In the two decades that followed 1931, nothing else - not bonds, cash, precious metals or real estate - did nearly as well.

Stocks Always Deliver Generous Returns

The lesson is that from these depressed levels, stocks will almost certainly deliver generous returns in the years ahead.

• If you have cash, ignore the fear mongers and naysayers and put some of it to work in the market now.
• If you’re cash light, at least maintain your exposure to equities and reinvest your dividends.
• If history is any guide, you will be rewarded for doing so.

Of course, I can already hear critics shouting that with the market at a 12-and-a-half-year low, this strategy hasn’t worked for buy-and-holders lately.

First off, I’m not recommending that you buy and hold…

Asset Allocate, Diversify & Use Trailing Stops

Those of you familiar with our investment principles know you should either asset allocate and rebalance - which both reduces risk and increases returns - or diversify broadly and use trailing stops behind your stock positions.

It’s also worth noting that it was 12-and-a-half years ago when Alan Greenspan originally warned us about a frothy stock market and the dangers of “irrational exuberance.”

No one is making those noises today. Irrational exuberance is as dead as Che Guevara.

And while true contrarianism is by definition a lonely business, 10 years from now this market is likely to be viewed as one of the great buying opportunities of our lifetimes. Just as it was for those with the cash - and the guts - to buy during the Depression.

Many investors will disagree, of course. And that’s fine.

As George Santayana famously said, “Those who cannot learn from history are condemned to repeat it.”

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