In the worst of times, which are the best of stocks?
So many readers have emailed me to warn that we are going into another Great Depression that I decided to find out which companies and sectors did best after the Crash of 1929. With the Standard & Poor's 500-stock index down 39% last year and another 8.5% this year, it can't hurt to learn what separated the winners from the losers back then.
Heath Hinegardner
The good news is that some stocks and industries did indeed do much better than average. The bad news is that the average was ghastly, and even the best stocks had three rotten years in a row.
With the help of the Center for Research in Security Prices, or CRSP, at the University of Chicago's Booth School of Business, I sought to answer this question: If you had invested on Jan. 1, 1930, after the crash already had destroyed a third of the stock market's value, where would you have gotten the greatest gains?
The short answer: In 1930, 1931 and 1932, nowhere. There was no real refuge in the storm; even Benjamin Graham, the great value investor, lost 60% over those three years.
According to CRSP, only one industry had positive returns from 1930 through 1932: logging. The two stocks in that tiny sector, Diamond Match and Mengel Co., whittled out a cumulative gain of 40% for the three-year period. Diamond turned timber into matchsticks; Mengel made trees into packing materials, primarily for daily necessities like tobacco and soap.
To find a major sector with significantly positive returns, CRSP needed to stretch our measurement period into a fourth year, 1933, when the market finally rebounded partway from its earlier losses by rising a record 54%. Even then, out of 120 industries, only 13 managed to generate gains from 1930 through 1933.
The only clear winner: cheap vices. Among the sectors with positive returns were cigarettes, cigars and tobacco, sugar and confectionery products, and fats and oils, which each gained between 1.6% and 7.5% annually. Those gains were better than they look, because deflation raised their purchasing power by an annual average of more than 6% over this period. It seems there was good money to be made investing in guilty pleasures that people could afford even in the hardest of times: sweets, smokes and fried food.
Of course, some of the industries in the CRSP sample scarcely exist today. It doesn't do us much good to learn that we could have earned a 5.9% annualized return by investing in leather tanning and finishing stocks, for example.
And the agriculture-and-commodity-based economy of the 1920s and 1930s was quite different from today's world. Barrie Wigmore is a retired investment banker at Goldman Sachs Group Inc. whose book "The Crash and Its Aftermath" is an indispensable guide to the stock market during the Depression. He says: "The truth is, we're really in no man's land. We've never been here before. It's much more important to focus on the variables that we really know today without cluttering your mind up with comparisons to the Depression."
What we do know, Mr. Wigmore says, is that consumers and corporations alike will be compelled to deleverage in the years to come. He sees three obvious opportunities. First would be the shares of great brand-name companies with manageable levels of debt, like Amazon.com, AMZN +0.48% Google, GOOG -0.16% NikeNKE +0.74% and United Parcel Service, UPS -0.03% but only when they are at least as cheap as they were last fall.
Second, you might consider the stocks of firms that enable consumers to indulge in cheap vices. Avoid tobacco companies, which often combine huge legal liabilities with too much leverage, and brewers and distillers, which also tend to carry too much debt. But companies like Costco Wholesale, COST +0.44% where consumers can buy snacks and candy by the crate, and PepsiCo, PEP -0.42% which spews out soda pop and corn chips, might fit the bill.
What if, like me, you keep most of your stock money in index funds? Mr. Wigmore has been diversifying into intermediate-term, investment-grade corporate bonds, which still offer attractive yields relative to Treasury securities. Corporate bonds returned 6.7% a year from 1930 through 1933, a return effectively doubled by deflation over the same period. Even if we dodge another Depression, today's yields on corporate bonds should make them a deal.
--------------------------------------------------
Market Insider with Patti Domm
The Stocks That Survived 1929
By: Patti Domm | CNBC Executive News Editor
Coca-Cola , Archer-Daniels and Deere should like this history lesson.
Even poor students of history know it never exactly repeats itself, but we all have been scratching the past for clues to guide us though the current harrowing times. So here's a historic analysis I think you'll find particularly interesting.
Think back to 1929, and you immediately think stock market crash. Ouch. Ok, that's similar to now. Next, think ahead two years into the future (that would be 1931). By analyzing stock performance, you'll see an interesting picture of investor behavior. Michael Painchaud, Director of Research and Principal at Market Profile Theorems did just that and he thinks some of these lessons are still relevant.
Painchaud looked at stocks as they made new highs after the 1929 crash. All three of those NYSE-listed stocks mentioned above were on a list of stocks that made new highs within two years of the 1929 crash. The 1929-'31 list, attached below, contains some other names you will know -- Federated Department Stores and U.S. Steel. There are others you maybe never heard of (Raybestos-Manhattan?), and some you'll be surprised by (Exchange Buffet, a vending machine cafe).
There's a heavy representation of food companies, industrials and manufacturing. Three movie companies made it too, and some old reliable utilities. You will notice that financial companies did not make the list.
"The lesson is obviously that investors had gone very defensive. Firms which tended to provide products and services which were at the very basic level of the economy did well, and there wasn't too much room for anything else," he said. But I note they bought entertainment names, too. (Do movies then = iPods, HDTV, and videogames now?)
Also, Coke wasn't the defensive name it is now. You have to assume it was more about growth.
You'll also note that there are quite a few preferred stocks. It makes sense, Painchaud said. "It's part of a very conservative investment view, and buying yield is a hedge," he said.
There are three miners, but Painchaud points out they are not defensive gold plays as you might think. "They were producing silver. It very well could have been the world was stockpiling silver for munitions for the coming war," he said.
So what about now? There was no technology-laden Nasdaq index in 1929, and Painchaud notes the biggest tech company of the time, RCA, didn't make his list. But I wondered if — as the 1920s clearly still showed the strains of America's move to an industrialized nation from a more agrarian one — could we compare that era to our transition to the high-tech era (using the 1980s lexicon)? Could tech names be the equivalent of some of the industrial names on Painchaud's list?
He agreed with my theory, but added that the tech names that are most basic may be the ones that recover first. If you use the lesson of 1929, he says you would conclude semiconductors might be on the list. That also correlates with something else he's seeing in his research: "In terms of insider activity, the semiconductors look like a buy as a group."
History doesn't always repeat itself. Your ETF wasn't there in the 1930s, and your broker wasn't putting his orders through on a computer... but some of the same psychology seems to be at work.
Painchaud's 1929-'31 list:(divided by industry)
Construction Materials
U.S. Gypsum
Raybestos-Manhattan
Consumer Discretionary
Bulova Watch
Consumer Products - Tobacco
American Tobacco "B"
Ligget and Myers "B"
Electrical Transmission
American Superpower
Energy/Oil
Standard Oil Co. (NJ)
Entertainment
Columbia Pictures
Paramount Pictures
Loews
Food Processors
Archer-Daniels Midland
Coca-Cola
Corn Products Refining $7 prfd
International Salt
Libby, McNeill and Libby
Swift International
Industrial
American Machinery Foundry
Warren Foundry and Pipe
General Refractories
U.S. Steel
National Can
Vanadium Corp. of America
New Jersey Zinc
Novadel-Agene
Worthington Pump
Superheater
Continental Diamond Fibre
Machine Tools
Bullard Co.
Manufacturing
Foster Wheeler
Thatcher Manufacturing
Ingersoll-Rand
Deere and Co.
American Chain and Cable
Mining
Lake Shore Mines
Dome Mines
Homestake Mining
Conglomerate
Atlantic Gulf and Western Industries Pfd.
Electrical Wiring
Driver-Harris
Restaurants
Exchange Buffet
Office Equipment
Addressograph-Multigraph
Oil Field Equipment
Dresser Industries
Pharmaceuticals
Sharp and Dohme
Publishing
Curtis Publishing $7 pfd
Real Estate
Equitable Office Building
Texas Pacific Land Trust
Retail
Federated Department Stores
Transportation RR
Missouri-Kansas-Texas
Missouri-Kansas-Texas pfd
N.Y. Chicago and St. Louis pfd
Utilities
Electric Power and Light
American and Foreign Power $7 pfd
American Power and Light $5 pfd
Electric Power and Light $7 pfd
--------------------------------------------------------------
Even poor students of history know it never exactly repeats itself, but we all have been scratching the past for clues to guide us though the current harrowing times. So here's a historic analysis I think you'll find particularly interesting.
Think back to 1929, and you immediately think stock market crash. Ouch. Ok, that's similar to now. Next, think ahead two years into the future (that would be 1931). By analyzing stock performance, you'll see an interesting picture of investor behavior. Michael Painchaud, Director of Research and Principal at Market Profile Theorems did just that and he thinks some of these lessons are still relevant.
Painchaud looked at stocks as they made new highs after the 1929 crash. All three of those NYSE-listed stocks mentioned above were on a list of stocks that made new highs within two years of the 1929 crash. The 1929-'31 list, attached below, contains some other names you will know -- Federated Department Stores and U.S. Steel. There are others you maybe never heard of (Raybestos-Manhattan?), and some you'll be surprised by (Exchange Buffet, a vending machine cafe).
There's a heavy representation of food companies, industrials and manufacturing. Three movie companies made it too, and some old reliable utilities. You will notice that financial companies did not make the list.
"The lesson is obviously that investors had gone very defensive. Firms which tended to provide products and services which were at the very basic level of the economy did well, and there wasn't too much room for anything else," he said. But I note they bought entertainment names, too. (Do movies then = iPods, HDTV, and videogames now?)
Also, Coke wasn't the defensive name it is now. You have to assume it was more about growth.
You'll also note that there are quite a few preferred stocks. It makes sense, Painchaud said. "It's part of a very conservative investment view, and buying yield is a hedge," he said.
There are three miners, but Painchaud points out they are not defensive gold plays as you might think. "They were producing silver. It very well could have been the world was stockpiling silver for munitions for the coming war," he said.
So what about now? There was no technology-laden Nasdaq index in 1929, and Painchaud notes the biggest tech company of the time, RCA, didn't make his list. But I wondered if — as the 1920s clearly still showed the strains of America's move to an industrialized nation from a more agrarian one — could we compare that era to our transition to the high-tech era (using the 1980s lexicon)? Could tech names be the equivalent of some of the industrial names on Painchaud's list?
He agreed with my theory, but added that the tech names that are most basic may be the ones that recover first. If you use the lesson of 1929, he says you would conclude semiconductors might be on the list. That also correlates with something else he's seeing in his research: "In terms of insider activity, the semiconductors look like a buy as a group."
History doesn't always repeat itself. Your ETF wasn't there in the 1930s, and your broker wasn't putting his orders through on a computer... but some of the same psychology seems to be at work.
Painchaud's 1929-'31 list:(divided by industry)
Construction Materials
U.S. Gypsum
Raybestos-Manhattan
Consumer Discretionary
Bulova Watch
Consumer Products - Tobacco
American Tobacco "B"
Ligget and Myers "B"
Electrical Transmission
American Superpower
Energy/Oil
Standard Oil Co. (NJ)
Entertainment
Columbia Pictures
Paramount Pictures
Loews
Food Processors
Archer-Daniels Midland
Coca-Cola
Corn Products Refining $7 prfd
International Salt
Libby, McNeill and Libby
Swift International
Industrial
American Machinery Foundry
Warren Foundry and Pipe
General Refractories
U.S. Steel
National Can
Vanadium Corp. of America
New Jersey Zinc
Novadel-Agene
Worthington Pump
Superheater
Continental Diamond Fibre
Machine Tools
Bullard Co.
Manufacturing
Foster Wheeler
Thatcher Manufacturing
Ingersoll-Rand
Deere and Co.
American Chain and Cable
Mining
Lake Shore Mines
Dome Mines
Homestake Mining
Conglomerate
Atlantic Gulf and Western Industries Pfd.
Electrical Wiring
Driver-Harris
Restaurants
Exchange Buffet
Office Equipment
Addressograph-Multigraph
Oil Field Equipment
Dresser Industries
Pharmaceuticals
Sharp and Dohme
Publishing
Curtis Publishing $7 pfd
Real Estate
Equitable Office Building
Texas Pacific Land Trust
Retail
Federated Department Stores
Transportation RR
Missouri-Kansas-Texas
Missouri-Kansas-Texas pfd
N.Y. Chicago and St. Louis pfd
Utilities
Electric Power and Light
American and Foreign Power $7 pfd
American Power and Light $5 pfd
Electric Power and Light $7 pfd
--------------------------------------------------------------
Somewhere along the line growing up, most of us have encountered the story behind "Black Tuesday" and "The Stock Market Crash of 1929." On October 28th of 1929, the Dow Jones Index dropped 12.82%. The next day, it dropped an additional 11.73%. Here is a small glimpse into the story behind the numbers:
On Tuesday, October 29, the flood of sales continued. Historians have called this "the most devastating day in the history of markets." A gloomy quiet pervaded the trading floor. The week before, traders ran across the floor in panic, trying to submit their orders before prices dropped further. That day, however, the stock exchange was as dour as a funeral parlor. A reporter from the New York Times described the somber scene: "Orderly crowds lined up before each post, talking in subdued tones, without any pushing." In that last week of October 1929, the stock market began a momentous decline that came to be known as "The Great Crash."During that time, $30 billion in stock value (about the same amount of money the United States had spent in World War I) evaporated completely along with people's dreams of achieving permanent prosperity.
I have no intention to understate the misery caused by this fallout or to suggest that the market crash of 1929 "just wasn't that bad." But I would like to add some context to the traditional understanding of this terrible stock market decline so that it may help you make more informed decisions about your own portfolio strategy.
Let us take a look at the price performance of four of the most legendary American stocks in the 20th century: AT&T (T), General Electric (GE), Hershey (HSY), and IBM (IBM).
If you take a narrow look at the stock performance of these four companies through the narrow lens of only 1929, then yes, things were incredibly terrible:
1. In September 1929, AT&T traded at $304 per share. By November 1929, AT&T traded at $222 per share.
2. In September 1929, General Electric traded at $396 per share. By November 1929, General Electric traded at $201 per share.
3. In September 1929, Hershey traded at $128 per share. By November 1929, Hershey traded at $68 per share.
4. In September 1929, IBM traded at $241 per share. By November 1929, IBM traded at $129 per share.
These are the statistics that you often hear bandied about in the history books. They provide an accurate read of the misery generated in 1929. But there are two important things that a singular focus on the price declines in 1929 do not tell: first, they usually do not note the crazy overvaluation of the 1929 stock market preceding the crash (the Dow Jones Index components traded at 25-30x earnings, and most large financial institutions traded at over 400% of book value). And secondly, they do not provide the broader perspective by noting the difference between, say, the 1927 stock market and the 1929 stock market.
When studying the stock market crash of 1929, the focus is always on the price of securities right before the crash happened, and then the low point after the crash happened. To get a broader perspective, let's take a look at the prices in August 1927 (before the speculative bubble occurred) and compare them with the November 1929 prices after "The Great Crash."
1. In August 1927, AT&T traded at $169 per share. In November 1929, AT&T traded at $222 per share.
2. In August 1927, General Electric traded at $142 per share. In November 1929, General Electric traded at $201 per share.
3. In August 1928 (1927 figures were not available for Hershey), Hershey traded at $53 per share. In November 1929, Hershey traded at $68 per share.
4. In August 1927, IBM traded at $93 per share. In November 1929, IBM traded at $129 per share.
What is worth noting is the fact that the AT&T, General Electric, Hershey, and IBM investors actually made a tidy profit between their August 1927 purchases and the post-crash prices in November 1929. But no one ever talks about that because it does not fit the historical narrative. Also, it would have been difficult from an emotional perspective to experience the rapid declines in paper wealth during the 1929 crash (the kind of people who would have thought "those businesses should not have been trading at such crazy high valuations" were probably not the types of folks that owned those securities during the crash).
When people want to sell you on the idea that the stock market is "rigged" or that long-term investing is a naïve pursuit, they will usually tell you that the stock market took about 25 years to recover from the Dow's pre-crash high of "300" to the next time the Dow Jones hit "300" in 1954. First of all, that view of investing completely ignores the effects of dividends (which ranged from a little under 3% annually to a little over 10% annually during the 1929 to 1954 period) which contributed significantly to total returns. And secondly, it assumes that you made a lump sum investment at the exact worst moment in the first half of the 20th century.
The best defense against stock market misery is paying a rational price for your securities. If you are evaluating a large-cap stock that is trading above its valuation multiples that it has seen over the past decade, be careful before making that purchase. When stock prices are going up, it is easy to rationalize a lot of investments (although I should note that current stock market valuations of most blue-chips are nowhere near the lofty highs of 1929). When you look at the window from 1927 to 1929, it can be helpful to keep in mind that it is not the transition from fair valuation to undervaluation that necessarily causes the extreme downward fluctuations, but rather, it is the transition from overvaluation to undervaluation that makes the declines so pronounced.
Insisting on a margin of safety in your initial purchase price is still the best defense there is. There is a reason why The Intelligent Investor is in print after all these years. That principal is timeless. If you can stick to the "margin of safety" principal as the stock markets continue to ride higher, you can hopefully look over your own investment record years from now feeling more like the guy that invested in August 1927 instead of September 1929. The folks that paid a rational price for some top-quality blue chips in 1927 actually increased their wealth and purchasing power even immediately after the Crash of 1929. Of course, none of that shows up in most historical records.
-----------------------------------
No comments:
Post a Comment