So I spent the weekend head-down in a book, but boy was it a good one! By Benjamin Roth, “The Great Depression: A Diary” is a fascinating record of the 1930’s and early 40’s from the perspective of a member of the professional class (lawyer.) Since it’s a diary, it’s naturally told from the perspective of someone who had no idea how the depression would turn out. When Benjamin Roth started his diary, he thought the depression he was experiencing would be a brief, painful correction like the many smaller depressions over the previous decades. Of course, it drags on far longer than he ever anticipated.
I don’t want to give the story away (after all, we already know how it ends), but I do want to share a few thoughts that struck me:
- The original purpose of the diary is to record Roth’s thoughts on the causes of the depression and to take instruction on how one should invest to avoid depression losses and take advantage of the lowered prices. Despite the goal of learning to invest throughout the depression, Roth had no money to invest. He visits this idea again and again: when the deals are the best, the investor must have ready cash.
- There was an appalling lack of diversification among the investors that lost their investments. Roth told stories about people who took their life savings and sunk them into one stock at the height of the market. Sadly, these people were wiped out. Another story he told was of a man who staked his savings on a stock that cratered, and then the remainder he saved from the stock he invested in second mortgages. Which disappeared as wave after wave of foreclosures rocked the country. Roth took from these stories the lesson that the investor should follow the European fashion: invest in a variety of securities from government bonds to common stocks.
- There were tremendous amounts of margin! Think about margin as the amount you have to put down to buy securities with loans. For example, let’s say you want to buy $20,000 worth of stock. And let’s say you have only $10,000. Well, to buy $20,000 worth of stock, you need to borrow $10,000. On margin. There are regulations* as to how much a person can borrow on margin to buy stock (let’s say 50% for the sake of argument.) Now think about buying a house. Under normal circumstances, banks require 20% down and will loan you 80% (margin.) So how much were these pre-depression investors putting down and buying on margin? They were putting 25% down and buying on 75% margin. This is unbelievable. Scandalous! Roth came to the conclusion, after talking to many investors through the depression, that margin was too dangerous to use.
There’s a lot more in the book, which I highly recommend. It’s heartbreaking to hear the hardship that people slogged through, and the grinding poverty the bank failures caused. It’s also interesting to hear the “real-time” lessons Roth draws during the depression, and the perspective that changes over time.