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Lessons From America’s Greatest Investment Tragedy

Benjamin Roth wasn't a professional writer or investor. But he wrote one of the most instructive investment books ever published.

Roth, an Ohio lawyer, kept a diary during the Great Depression, writing several times per week from 1931 through the early 1940s. His son published it in 2010. The entries are rarely more than three sentences, but vividly describe life during America's worst economic tragedy. One entry from April 6, 1932 simply states, "Insanity and suicide among prominent business men is on the increase."

Roth was fascinated with the stock market, and how smart people could be destroyed by it. He repeats, over and over again, a simple investing lesson obvious to everyone who lived through the depression: the incredible value of having ample cash in the bank.  

July, 1931: "Magazines and newspapers are full of articles telling people to buy stocks, real estate etc. at present bargain prices. They say that times are sure to get better and that many big fortunes have been built this way. The trouble is that nobody has any money."

Aug., 1931: "I see now how very important it is for the professional man to build up a surplus in normal times. A surplus capital of $2500 wisely invested during the depression might have meant financial security for the rest of his life. Without it he is at the mercy of the economic winds."

Dec., 1931: "It is generally believed that good stocks and bonds can now be bought at very attractive prices. The difficulty is that nobody has the cash to buy."

Sep., 1932: "I believe it can be truly said that the man who has money during this depression to invest in the highest grade investment stocks and can hold on for 2 or 3 years will be the rich man of 1935."

June, 1933: "I am afraid the opportunity to buy a fortune in stocks at about 10¢ on the dollar is past and so far I have been unable to take advantage of it."

July, 1933: "Again and again during this depression it is driven home to me that opportunity is a stern goddess who passes up those who are unprepared with liquid capital."

Aug., 1936: "This depression has indelibly impressed on my mind one thing, and that is the value of having on hand sufficient capital to cover emergencies. My experience as a lawyer shows that a large proportion of business failures are caused by lack of capital rather than by lack of technical business knowledge."

May, 1937: "The greatest chance in a lifetime to build a fortune has gone and will probably not come again soon. Very few people had any surplus to invest—it was a matter of earning enough to buy the necessaries of life."

Keep in mind what happened during this period. The Dow Jones fell 89% from 1929 to 1932, and unemployment shot to 25%. Those without enough cash to endure were forced to liquidate assets for pennies on the dollar. Then the market rose almost fivefold from 1932 to 1937 in the biggest five-year rally in history. Several blue-chip companies increased 10 or 20 times over. Those without cash (and guts) saw the greatest investment opportunity of their lives waltz right past them.

This story repeats itself throughout history, just not as severe. During booms, all people care about is return, and complain about how worthless cash in the bank is, earning a puny yield. During a crash they realize that nothing is more precious than cash in the bank, even if you had to sit on it for years earning that puny yield.

We're doing this again today. So many are livid that their cash in the bank earns no more than 0.01%, losing money every day to inflation.

I think this is a terrible way to think about the value of cash, and it causes people to chronically underestimate its real worth. Cash doesn't earn much today, but it gives you options in the future. Over time, that potential can more than offset the dismal yield earned today. If earning 0.01% today allows you to become a financial vulture in a future market crash -- or avoid becoming a desperate seller -- then you're really earning far more than 0.01% on your cash today. It's hard to convince some people of this, because all they see is the advertised 0.01% return. But having options has real value. "Cash combined with courage in a crisis is priceless," Warren Buffet once said.

Most investors have never heard of Arnold Van Den Berg, but he's one of the greatest investors of our time. Since 1974, Van Den Berg's fund has returned 14.5% a year, versus 11.9% a year in the S&P 500. $1,000 invested in his fund in 1974 would be worth $196,000 today, versus $80,000 in the S&P.

On average, cash has made up more than 20% of Van Den Berg's assets, compared with closer to 5% for the typical mutual fund. He was once asked why, as a stock-picker, he hoards so much cash. "Think of it this way," he said. "If we sit in cash and wait for a $15 stock to get down to our $10 buy point, then when it eventually goes back up to $15, we get a 50 per cent return on our investment. We think this more than makes up for the few months or quarters we might have to wait in cash, even if cash paid no yield at all." When you come to terms with how common market volatility is, this attitude can be a huge advantage.

"That cash you're holding today is the raw material of tomorrow's superior returns," Van Den Berg said. He understands what it took a depression for most to learn.

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Read/Post Comments (13) | Recommend This Article (75)

Comments from our Foolish Readers

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  • Report this Comment On May 20, 2014, at 11:11 AM, hbofbyu wrote:

    Very useful in light of your statistic from a previous article:

    "Since 1928, the S&P 500 has declined 10% or more from a recent high 89 times, or about once every 11 months, with just a handful of years escaping a 10% dip. Ten-percent pullbacks are almost as common as summers. Twenty-percent market drops have occurred 21 times since 1928, or about as often as presidential elections."

  • Report this Comment On May 20, 2014, at 11:24 AM, mdk0611 wrote:

    Wouldn't another way of stating this be:

    1. Always have a rainy day fund (the amount can be debated) in cash, and

    2. Part of "diversify, diversify, diversify" includes a position in cash.

  • Report this Comment On May 20, 2014, at 2:55 PM, djlaino wrote:

    Good article Morgan. I have read similar articles in the past that described viewing a cash position in terms of opportunity. Just as you write, it provides opportunity to invest when the investing is good. The cost of that opportunity is the lack of return of the cash position waiting for that opportunity to arrive. My struggle with this is how to rectify the benefit of a cash position with the struggle against (small "f") foolish attempts to time the market.

  • Report this Comment On May 21, 2014, at 12:11 AM, ScottmFool wrote:

    This is great, both the quoted book and this article.

    I'm so glad I'm accumulating cash.

  • Report this Comment On May 22, 2014, at 9:22 AM, zvrastil wrote:

    Hi Morgan,

    have you tried to test this approach on available historical data? Though I intuitively agree with your point, I tried some backtesting on SP 500 returns after your first article. And I was not able to find simple systematic approach that beats simple dollar-cost averaging (inflation adjusted).

    I generally tried to backtest strategies where you keep some percent of your monthly available cash aside and invest it (or part of it) when market declines by some threshold. No combination of parameters returned more than simply investing all your available cash every month (unless there's a big recession soon enough in your testing period).

    There were two forces against you:

    1. If you wait for small market decline, it often happens after market already raised more than that amount. So you the market price (though declined) is still higher compared to price at the time you've put your cash aside.

    2. If you wait for large market decline, inflation eats too much of your cash to get good return on its original value.

    Best regards, Zbynek

  • Report this Comment On May 22, 2014, at 9:41 AM, TMFHousel wrote:


    So much of the cash approach is a benefit outside of investing. If having cash lets you avoid having to take on debt in an emergency, or becoming a desperate seller if you get laid off, the returns can be huge.


  • Report this Comment On May 22, 2014, at 9:07 PM, slash32is4 wrote:

    having cash or being short before the crash Jesse Livermore style

  • Report this Comment On May 22, 2014, at 10:07 PM, dbtheonly wrote:


    Livermore went to prison.

  • Report this Comment On May 22, 2014, at 10:14 PM, awallejr wrote:

    Kind of speaking in hindsight. Sure having a hoard of cash right after the 1929 crash and even the recent crash to March of 2009 IF, let me repeat since this is key, IF that person then redeployed it into equities would have made fortunes.

    Problem is people are and were generally afraid to do so. This site alone scared people to death back in 2009, a time when I said, BEFORE Jim Cramer, was a generational opportunity to buy. I know I was there, being one of the few voices saying buy.

    If you hold some cash for the purpose of taking advantage of opportunities that is fine. But historically investing in yield producing stocks over time works.

    Interesting argument between Mr. Wonderful of Shark Tank and Chicken Little Guy Adami tonight. Personally I thought BOTH were right.

  • Report this Comment On May 23, 2014, at 12:50 AM, somethingnew wrote:

    "So many are livid that their cash in the bank earns no more than 0.01%, losing money every day to inflation."

    I really don't blame them at all for being angry. The government is essentially forcing people to buy into stocks if they want to get any kind of a decent return at all. Fortunately, I am one of those that enjoys investing and has been rewarded for being in the market for the past couple of years. That said, I still keep the majority of my savings in cash but bought growth stocks with the little I did invest which yielded really nice returns to make up for the majority of cash getting less than a percent.

  • Report this Comment On May 23, 2014, at 10:38 AM, bamasaba wrote:

    Morgan, you are confusing me a bit here. In the article you seem to be advocating that we set aside cash to time the market with it. But when zvrastil points out that this approach often doesn't work as when empirical validation, you change to saying that one should set aside cash in an emergency fund.

    I think that the majority would agree with the cash for emergency fund idea. However, I have my doubt's about the timing the market benefit of cash (and it seems that zvrastil does as well).

    Which are you actually advocating?

  • Report this Comment On May 24, 2014, at 11:04 PM, Jmp627 wrote:


    I don't know much more about US markets but in Indian Market I have successfully applied the above strategy and It work very good in longer time horizon , I thanks to you for article and bringing up new layer of thinking in Investment

  • Report this Comment On May 27, 2014, at 5:38 PM, hangemhi wrote:

    The problem with his concept is you still have to know when to buy. For example, had Roth invested $2500 in July or August 1931 when he first mentioned buying, his investment would have gone straight down for another full year - going below $800. Imagine turning $100k into $33k. Bottoms happen when most capitulate - so clever 1931 Roth likely would have thrown in the towel in July 1932 after his wife threatened to leave him if he did THEN save cash.

    Meanwhile after 2009 most "experts" were predicting the "real" collapse was still coming, so most didn't buy this 5 year rally. And every time you think you should buy, you know a pull back is coming, so you wait. And the pull backs that do come are scary, so more down and the "real" collapse keeps you from buying the dip.

    This is the fact of life in stocks - most must be wrong. Most buy into tops, otherwise there wouldn't be tops. And most sell into bottoms, otherwise there wouldn't be bottoms. How do you not be "most"? Like Roth, chances are you won't be no matter how many of these articles you read.

    We're mostly doomed to be like Roth in 1937 - in hind sight we coulda, shoulda, woulda taking advantage of a "chance in a lifetime".

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Morgan Housel

Economics and finance columnist for Analyst, Motley Fool One.

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