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The Great Crash of 1929 - John Kenneth Galbraith


Parsad
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[amazonsearch]The Great Crash of 1929[/amazonsearch]

 

Superb book!  I recently re-read it and you could easily substitute financial institutions, hedge fund managers and politicans from the last few years.  One of the best books I've read on the psychology behind booms and busts, and how virtually every cycle is similiar outside of duration and depth.  Cheers!

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So, I just got around to this book, after reading the manias/panics book.  I have to say, I was pretty disappointed.

 

The book is littered with assertions regarding the "speculative" nature of stock investments without any reference to valuation.  Galbraith makes a big deal out of talking about how much prices rose.  The thing is, I don't care how much prices increased if there isn't some discussion of underlying earnings or valuation; if they were going from 1 P/E to 2 P/E, that's a very different situation than going from 20 to 40 P/E.  The one time he did mention valuation, I believe it was when the GM CEO said that GM should sell for 12 or 15 P/E, which was apparently higher than the current valuation--that does not seem like a crazy speculation to me.  In fact, many people on the board think GM should be selling at those P/Es!

 

Moreover, I've also read articles like these:

http://www.crossingwallstreet.com/archives/2013/02/how-overpriced-were-stocks-in-1929.html

 

Certainly, the investment trusts, their leverage, the margin of investors, and the lack of bank insurance could (and did) lead to instability, but it doesn't seem like we were dealing with anything close to 1999.  Only the CAPE showed very high levels, but that is mostly because there was a massive increase in earnings/productivity over that decade, from the previous recession.  If he wants to say the earnings weren't real, then he should have made that case.  In fact, he seems to indicate that no one could really tell the economy was collapsing when the crash came (which feeds into his quote about not being able to make forecasts).  I'm having trouble reconciling what was going on without just saying there is a lot of hindsight bias in his assertions. 

 

Thus, it seems like it would be difficult for an investor to realize how much trouble they were in in 1929, given the facts at the time.  I haven't found any evidence that I would be able to figure it out at least.

 

Any comments on the above?  I'd like to be disproved here.

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. . . it seems like it would be difficult for an investor to realize how much trouble they were in in 1929, given the facts at the time.  I haven't found any evidence that I would be able to figure it out at least.

 

It could be you're just being too modest a value investor!  Or, maybe even Graham was afflicted with hindsight bias as well:

 

". . . a rigid observance of old-time canons of common-stock investment would have dictated the sale of one's holdings at a substantial profit very early in the upswing and a heroic abstinence from further participation in the market until at some point after the 1929 collapse when prices were again attractive in relation to earnings and other analytical factors.  No doubt this would have resulted in making repurchases too soon - as matters turned out - with consequent paper or actual losses. . . .  The chief weakness of these investment principles was the difficulty of adhering firmly to them in the speculative contagion of 1928 and 1929."  (from Security Analysis, 1934 edition, pages 8-9)

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Great Crash and its Aftermath was an excellent book. Heavy statistics and P/E ratios too.

 

I remember a bunch of companies going from 500% Book to 40% book (back when book actually meant something more serious). Or from 172 P/E to 10 P/E. Pretty unbelievable.

 

 

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