3 investing lessons from the 1929 stock market crash

The infamous stock market crash of 1929 has lessons for today’s investors. Our writer shares three that inform his own investing strategy.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

As investors pay close attention to what might happen next in stock markets, I think there is a lot to be learnt from past experience. Even today, lessons from the 1929 stock market crash will hopefully help me navigate turbulent markets. Here are three lessons from 1929 I am applying when making decisions about my portfolio.

1. London and New York feed off each other

The month before Wall Street crashed, the London market did. A leading British investor was jailed for fraud, the markets gyrated wildly for some days, and then prices collapsed. A ripple effect contributed to the Wall Street collapse just weeks later.

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1929 is almost a century ago. Yet what happened in London already impacted New York markets and vice versa. Today with advances in technology and globalisation, that is perhaps more the case than ever. A lesson I take from the 1929 stock market crash is that one market can be affected by another, even if it is thousands of miles away. Looking at Tesla or Peloton trading in New York, it could be easy for me to think that the performance of these shares I do not hold will have no impact on the British shares I own. But almost a hundred years ago, the impact of events in the financial markets could already ripple strongly across the Atlantic. No stock market is an island.

2. Every bubble bursts

In the years leading up to the 1929 crash there was increasing speculation. A speculative bubble grew and an increasing number of warning voices urged caution on investors.

But this time, extreme bulls argued, things were different. The economy had been transformed fundamentally. Shares deserved their valuations even if they looked excessive using previous valuation metrics. So the argument went.

Sound familiar? It is basically the story of every stock market bubble, of which 1929 was just the most notable. In the end, the bubble always bursts. It can be a dramatic popping, like the 1929 crash. Or it can be the slow release of air that takes the life out of a bubble gradually, as seen in the Japanese property market from the 1980s onwards. But for me, the lesson is the same: if it looks like speculation and smells like speculation, it is probably speculation.

I do not know when any given bubble will burst, but I do know that bursting is the fate of bubbles. By focussing on long-term investment rather than speculation, bubbles bursting can turn from a possible source of panic to a buying opportunity for my portfolio.

3. A stock market crash and the long haul

I try to buy shares I would be happy to hold for decades. I think the 1929 crash shows why that strategy makes sense. The Dow Jones index did again reach its September 1929 peak. But it only did so in 1954, a quarter of a century later.

Buying overvalued shares with the hope of offloading them in a hot market is speculation not investing. If a market peaks and takes a quarter of a century to recover as it did after the 1929 crash, such an approach can be very costly. That is why I focus on buying shares in high-quality companies whose future prospects look good to me. If I end up holding such shares for decades, that suits me fine.

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Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Peloton Interactive and Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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