In this podcast, Motley Fool senior analyst Bill Mann discusses:
- What he's watching in the market.
- Where he's been putting his money to work and which stocks he's been buying.
- His relative disinterest in IPOs as an event.
Author Morgan Housel joins Motley Fool host Alison Southwick and Motley Fool retirement expert Robert Brokamp to talk about the speculative boom that caused the Great Depression, and how those lessons apply to investors today.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on June 14, 2022.
Chris Hill: Today we've got Morgan Housel doing what he does best: looking at financial history and drawing lessons for today. Motley Fool Money starts now. I'm Chris Hill and I am joined by Motley Fool senior analyst Bill Mann. Thanks for being here.
Bill Mann: Hey, Chris, how're you?
Hill: I'd be doing better if the market was going higher. But in that sense, I have a lot of company, don't I? We would all be doing a little bit better [laughs] if the market was going higher.
Mann: Yes, exactly. I guess the good news is that you're not necessarily wondering what you have done wrong.
Hill: No, that is true, so that is some solace. I wanted to get your thoughts on just stepping back. I mean, sure, we could talk about Oracle's earnings if you really want to. But I'm more interested in Bill Mann's big-picture view of where things are right now. Because something Jason and I had talked about yesterday was the level of pessimism in the market right now. I don't want to say it's unfounded because when you have smart people like Jamie Dimon coming out and saying, I think there is an economic hurricane coming and the only question is how bad it's going to be, and by the way, we're going to be doing X, Y, and Z with our balance sheet. We are going to be more conservative. If there's a lot of pessimism out there, at least it's grounded in something. Let's stick with pessimism for just one second. Do you look at the commentary? Do you look at the reaction and some of the comments from maybe not Jamie Dimon, but noted investors? Do you think it's in line with your thinking? Because there are some people out there saying, hey, look, this is bad and I think it's going to get a lot worse.
Mann: It's amazing to me that you bring up Jamie Dimon in his comments right out of the gate because Jamie Dimon joined a CEO roundtable. He's told the story a number of times in his early teens. One of the first things that he did was, the CEO roundtable, they all got together and talked about "What's this next year going to look like?" Jamie Dimon went through the process and you would think that CEOs know more than anybody else. He just had some researchers go back and say, OK, they have done this for every single year. Let's go back and see how accurate they were in their prognostications.
Chris, you would not be surprised to hear that they were not very accurate. They were not very good at prognosticating, the people who you would think, and they're in a semi-private room. They're not talking to the public; they're talking to each other. They're not very good about prognosticating. Now I look at what's happening now and yes, Jamie Dimon came out and he said "I see a hurricane coming." He is at a structurally important bang-up financial institution. So yes, he sees the sheet music that's being handed to him. But if we were better at prognosticating, do you think that the S&P 500 would have only been allocated 2% to energy companies in 2021 if we were good at seeing what was coming? We're not. We're not good at seeing what's coming.
Hill: Sorry to get personal, but are you doing anything with your cash right now? Something Jason and I talked about yesterday was putting money to work slowly. I'll just say in my own financial life earlier this year when the market dropped, what I thought was a [laughs] decent amount, I looked at some of the really stable, sustainably profitable businesses that their shares looked like they were on sale to me, and in some cases, they were -- companies like Microsoft and Johnson & Johnson, and Apple and that sort of thing. I thought, OK, I'm going to buy some more shares of those. To a company, they've basically fallen further. I don't know. I'm one of those people who's like, I think I'm holding on to my cash for right now. What are you doing with your money?
Mann: I actually have been investing. One thing that's really important to recognize is that the price you pay is a form of risk. The higher the price of any company. If you can buy it at $10 a share versus $20 a share, it is essentially the same company. If you buy something at a higher price, you are essentially even if it doesn't feel like it at the moment, taking on more risk. The inverse of that is now, that you have companies that are down 60%, 70%, 80%. Some of them are dramatically the same companies. Some of these companies should have never been priced as high as they were and will probably never come back. But what's happening right now? Somebody who lives in an emerging market would be very comfortable with what's happening right now, because everything's getting sold.
Every asset class, bonds are being sold, sovereigns are being sold, commodities are being sold, and stocks are being sold. That is something that people in developing markets are very happy about, but they're comfortable with -- that type of indiscriminate selling suggests to me that we should in fact be looking at the other side of the risk equation and buy. I think it's really easy for people to say, well, the stock's down 90%, so therefore it must be cheap. Some of these companies are never coming back, but I have a hard time believing that Berkshire Hathaway, which I had bought some a few weeks ago, is really that deeply impacted, or Mastercard, or Google, or Domino's Pizza. These are companies that are incredible at making money over the cycle, and news flash, we have not cured the economic cycle. Over the cycle, these companies will continue to make a lot of money. The last I checked, that's the point of investing.
Hill: It's Tuesday morning as you and I are having this conversation. I think it's reasonable to say that if not all eyes are on the Federal Reserve, most eyes are on the Federal Reserve, the meeting, and the likelihood of a rate hike coming later this week. Are you watching that, and if not, what are you watching to give you a better sense of where the economy is going in the near term?
Mann: I mean, I think it's interesting what's happening, and what we're going through right now is fairly unprecedented. In some ways right now goes over the last decade. But also what's happening right now is, the last four days or the last six months, our economy is obviously struggling, but we're also seeing inflation. Usually, when you have an economy that's struggling in the way that ours is now, both United States and globally, the Federal Reserve or central banks are going to step in and add liquidity. But because we've got an inflationary environment and it is dangerous, they are having to continue to raise rates, which does not bode well for asset pricing. But asset pricing ultimately at the end of the day is not the horse that leads the economic cart. I mean, it is actually the opposite. So for me, what we're seeing right now is the backslide, not just of two years of an incredible amount of liquidity being put into the market but almost 15 years, going back to 2008.
I mean, we've gone through a decade in which sovereign debt around the world in 2020, $17 trillion of it traded at a negative rate, which meant that if you held the debt, you paid for the privilege. This is prior to 2015. That was a unicorn sighting. So we are coming out of what has been one of the strongest economic periods in world history, not just our lifetimes. I'm talking a thousand years of actual centralized financial systems. It just bears remembering that when you come out of something that's weird, those weird things are going to happen on the backside. I've been buying stocks.
I'm not particularly convicted about it. If you were to tell me that the market was going to go down another 40%, I'd say, nah. People are out there still spending six figures on a weird picture of a monkey that's got some code behind it, so who really knows? But I do know right now that the Fed is fighting something that was a natural outcome of some real financial stress, and at the end of it, we will hit an equilibrium.
Hill: Last thing, and then I'll let you go. You had mentioned that some of these companies are not coming back. You and I have talked before on this show about the SPACs that just littered the markets last year and the year before. Certainly, now we look at some of them as public companies and think now, OK, yeah, you probably shouldn't have.
Mann: You were a money grab.
Hill: This was money-grabbing, and you probably have no business being in the public markets. I forget who said it, but I heard someone say recently that asked the question, the rhetorical question, who in God's name would go public in this environment right now? Are IPOs something that you look at as a positive sign somewhere, whether it's later this year or into 2023, because it really does seem like we went through a long stretch of time where we didn't really collectively ask the question about any company going public. Why are they going public? We just thought, oh, OK, here's a company going public. It seems like, Bill, we're in an environment right now where if a company were going public, that would be the first thing we would ask. Like, really, you're going public now, in this?
Mann: The crazy thing is, I don't really care that much about IPOs just because I like them so much. I think I like so much understanding how a management team is going to interact and behave as a publicly traded entity. I don't care what people say; it is an entirely different experience to have the public-facing you on a quarter-by-quarter basis from when you were a private company. The thing is, Chris, there are hundreds of SPACs that have been stood up as buckets of money that they have an egg timer, they have to continue to bring companies public. You're going to see additional companies come public. I actually think that it is a little bit more of a target-rich environment.
Now you may see companies that are coming public through SPACs because there is a mutually agreed but not expressed desperation between the two. [laughs] Like we need the money, you have the money. Let's do a thing and we'll deal with the consequences later. You're going to see more companies come public. I tend to think of times like the SPAC bubble, so many companies coming public. You have to remember that they're not doing that for the benefit of investors. They're doing it at a point in time in which it is good for them. The fact that it is a much more difficult time to go public may actually mean that it is a better time to be on our side of the ledger and be buyers of stocks.
Hill: I'm sorry, but your SPAC analogy just immediately brought to mind bartenders as last call, and two people just look at each other and, all right, [laughs] why don't we go home together?
Mann: [laughs] I'm sorry. We haven't been stupid enough yet, but there's just enough time.
Hill: Bill Mann. Always great talking to you. Thanks for being here.
Mann: Thanks, Chris.
Hill: In the wake of stocks falling this year, we decided to look back at other market crashes from history. A few years back, Morgan Housel joined Alison Southwick and Robert Brokamp to talk about the speculative boom that caused the Great Depression and how those lessons apply for investors today.
Alison Southwick: Let me set this stage for you. It's the roaring '20s. In the wake of World War I, the nation's wealth more than doubled. This means that a lot of people had enough money to become full-blown consumers. They could buy newfangled things like electric refrigerators and radios and, lest we forget, the Model T. In this prosperous America you could have anything, except alcohol, of course. But the party didn't stop. [laughs] Suddenly. So today, Morgan, joining us for our series this month looking at market crashes in the U.S., and why not start with the big one, that great crash, Black Tuesday. But before we get into the actual crash, what was life like, leading up to the Great Depression?
Morgan Housel: Whenever people talked about what caused the Great Depression, what caused the crash of 1929, it's always easy to point to one thing, but then what caused that one thing that you can always keep going back in time and say what really caused all this to happen. If we are talking about the Great Depression, I'd like to start with World War I. Something really important happened in World War I. Frederick Lewis Allen is a great historian who wrote history in the 1920s and 1930s. He made this point that during World War I, to finance the war, they sold liberty bonds to average everyday Americans, not just wealthy people, but everyday Americans were buying liberty bonds to finance the war. It was the first time that most Americans had any experience with stockbrokers.
Because stockbrokers up until that point only dealt with wealthy people and aristocrats, and now it was every day trained conductors and farmers going in and talking to a stock broker to buy these liberty bonds because there's such a push of patriotism to buy these bonds. Because of that, not only did people get their first taste of what it was like to work at a stockbroker. But stockbrokers had to learn all kinds of new skills to sell to these average everyday people and high-pressure sales tactics had like a needle there in security and get them to buy something that they really didn't need.
But the salesmen's job was to convince them that you needed this. It was set up in the late nineteen-teens, this early dynamic of Main Street's affiliation with Wall Street that had no relationship before that. That's where I think the seeds of the Great Depression were ultimately planted getting everyday people who didn't have a lot of money and had no sophistication, no training or education, getting them involved with Wall Street.
Southwick: But then they had no place to get educated either.
Housel: Yeah.
Southwick: You're just going to have to trust this stockbroker guy.
Housel: That's the first seeds that were planted, and then after World War I, all the troops came home. Devastating period for the war, and the economy instantly falls into a really deep recession, really bad, high deflation, really high unemployment in the early 1920s. Frederick Lewis makes this really interesting point I think that between the war and then the recession when people came home, the people just got tired of being tired after like seven years of everything going wrong. There was a period in the early and mid-1920s when people just said, I'm ready to have fun again. We've been dealing with a decade of everything going wrong between war and the recession, I'm ready to let loose and have fun again. It was almost like the spark that he wrote about that in the early 1920s, people were just ready to have fun and just let loose and a few other things happened at the same time.
That's really important leading up to the Great Depression. Just continue on with the stories of really awful things happening. 1921, there was a really awful famine in Russia, and the United States wanted to do something about it. The U.S. government set an artificially high price for the price of wheat and told farmers as much wheat as they can grow, we will buy it from you at this inflated price. The price of wheat at the time was, I think $0.40 a bushel and the government said, we will buy as much as you can grow at a $1 a bushel so that they can send it to Russia to help break the famine. You had all these farmers that overnight basically were minting money and planting as much wheat and corn as they could and making a fortune doing it by selling it the government. It was so lucrative to be a farmer back then during this time because of these inflated prices that they had, what were called suitcase farmers, which were people from Chicago and Minneapolis who were, maybe they were lawyers or insurance salesmen that would take the train into Iowa and buy a small farm and grow wheat.
They come in with their suitcase. [laughs] Maybe farmers on the weekend go home because you can make so much money doing it. Farming was such a big part of the economy back then that in the early 1920s when that started, it was just a huge stimulus to the overall economy. This big farming surplus was going on. At the same time that you had people that were just ready to get back into having fun and helping grow the economy again and so it was like almost overnight in the early 1920s, the US economy just took off like a rocket ship. Part of that was coming out of this recession in the early 1920s and then you combine that with this big farming stimulus and it was just boom off to the races. Because of the psychology at the time, Frederick Lewis Allen writes a lot about this at the time. That these people were so ready to have fun again that you mix that excitement with that much extra money that was flowing around it was just a boom time in the 1920s and you mix optimism with a lot of money and people start making really bad decisions. [laughs]
Robert Brokamp: [laughs] Then if you also add in debt, because a lot of people didn't have necessarily all the money to buy these new consumer goods or these investments, but there were people who were willing to lend on money to do that. Back then, the margin requirement to borrow money to buy investments was only 10 percent, so if you want to buy a thousand dollars worth of stock, you only need to put down a hundred bucks. All that thing had to do is drop 10 percent and then you've lost all the equity in that investment.
Housel: Also during this period in 1920s, two of I think the most important inventions of the 20th century, the car and the radio, were coming online for average everyday people and that just added to the sense of optimism of what we could do as a country, what our potential was. That completely changed American life in the span of a few years, the car and the radio. Then you add all that together, you have people who for the first time ever have connections to stockbrokers. You have this big economic boom from farming.
Then you have all this optimism coming from the airplane and the 1920s making a lot of people know the booming twenties or roaring twenties. It was a great time for a lot of people that just led to a lot of excitement and over-optimism and so led to in the late 1920s, probably the biggest stock bubble that we've ever seen. That really took place in just like a year or two, is really like 1928 and early 1929 that the market just went straight up, just went parabolic and day after day after day stock prices for all companies were just going straight up and increased by several multiples just in the late 1920s to create a bubble that, it's hard to measure it because earnings and whatnot weren't measured back then, but probably much bigger than the 1999 stock bubble, just completely detached from reality by 1929.
Southwick: Let's get to the actual bursting of the bubble.
Housel: What's interesting too is that it didn't happen in one day. We talk about the crash of 1929, but that played out over a week and is basically three days in October of 1929 when the market fell about 12% each day consecutively. I think putting that together, rather than all happening at once, having it spread out a little bit, gave investors at the time, I don't think it was asked traumatic as we would expect it to be today because it happened slower than say, the crash of 1987. It just played out slowly and people were so accustomed to prosperity and rising stock prices that the 30 percent decline that happened in October. Was it a big deal? Of course.
Did stockbrokers jump out the window? Literally, yes, there were accounts of that happening. But I think people were so shocked and a 30% decline in the grand scheme of things, isn't that huge? In three days, it's big, but it's not that big a deal, stock prices fell 20 percent in the US in 2011. There was still a pretty big sense of optimism at the time and Herbert Hoover who was President and Andrew Mellon, who was Secretary of Treasury at the time, made a big push in the media and newspapers to say, business is sound, the fundamentals are strong, this is a temporary break, as they called it back then, but we're going to pull through this, everything is OK and I think people bought it at the time. As the month kept playing out into November and December of 1929, things stabilized and recovered a little bit and the big idea was, that was it, that was tough, but things are going to move on and things are going to keep going. There's a little bit of a rally after that, but people really had no idea what was still to come.
Southwick: Apparently yes, so what was still to come and how are we going to suffer here?
Housel: Even by mid-1930, most economists thought by looking around and what was happening, that we were in a pretty bad recession, but nothing more than that. A pretty severe recession but nothing of historic terms. It was the summer of 1930 and as we moved into 1931 that the banking system started cracking, which was caused a lot by two things. One, all these investors with margin debt who were buying from banks, were now defaulting on the debt that they were borrowing. But also, wheat prices and corn prices started plunging, so then farmers who had been a big driver of the economic boom of the 1920s and had leveraged up with all debt to buy farm equipment whatnot were defaulting at record rates too. Back then, the Federal Reserve worked in a different way.
They didn't bail out banks like they do today and more importantly, the big thing was there was no FDIC insurance, so if your local bank was going down, your life savings was going with it. That began the bank runs of the early 1930s, which is where things really started getting out of hand. It peaked in 1932 and there was starting a wave of bank failures in 1932 and the big one actually was a bank in Austria called Creditanstalt in Vienna, that was a huge bank in Austria and it failed overnight and no one really saw it it coming. There have been some economists who've mapped this, how it happened. After Creditanstalt failed in Vienna, then it spread to Paris and then spread to London and then eventually spread to New York. There was a bank called the Knickerbocker Trust in the United States that failed in New York and after that, the curtain just came down.
Southwick: Knickerbocker, that's like the most perfect name for a failing bank in 1920s [laughs].You couldn't write that.
Housel: After the banks started failing, that's where things started getting really ugly in the United States. Now we're into 1932, so we're three years after the crash of 1929, which I think, to me that's probably the biggest misconception of the Great Depression, is that there was a crash in 1929 and then boom, welcome to The Great Depression and it wasn't. The first couple of years played out slowly over a period of many years. If you think about the 2008 financial crisis, the worst of that was really contained in literally a 90-day period. In late 2008, September, October, and November and then it was pretty much over. The Great Depression played out over three years and what I think did the opposite of what the 1920s did, is that people just got accustomed to pessimism. Their hope vanished, after you've just been beaten up consistently for three years, people just lose all their optimism and all their faith. That feeds on itself, because if businesses and employees, and investors don't have any optimism, and don't have any confidence, then it's really hard to get them.
Southwick: Nothing goes up.
Housel: The stock market bottomed in mid-1932. Unemployment in the economy bottomed in 1933, four years after the crash.
Southwick: How do we recover? How do we get out of this?
Housel: This is where things could get political and a lot of people still disagree with this 90 years later, but Franklin Roosevelt is elected in 1932 and started with the new deal. There's that element of it, of economic stimulus from the new deal, just changing tactics and whatnot. There's also a thing with all recessions that if prices get low enough, stock prices, housing prices, labor prices, if things get low enough, then it's attractive to get back in business. Every investment, every business opportunity is attractive at some price and prices got ridiculous low and 1930s everywhere, the price of labor, the price of food. By 1932, stock prices were down 89% from their 1929 peak, so just completely obliterated. But there are still a lot of good companies out there.
Southwick: You talked about the FDIC. Did that come out of this? What other legislation or regulation came out following the depression to keep this from happening again? Because it's obviously never going to have an again.
Housel: [laughs] Not going to let it.
Southwick: No, it's only going to happen over the next three episodes of this podcast. Not this bad, of course.
Housel: The few big ones besides FDIC Insurance, one was the SEC and a lot of the reason that the market grew so high in the 1920s, is because fraud and bad behavior in the stock market was rapid. One of the big actors during the 1920s who made a fortune ripping people off in the stock market was Joseph Kennedy, JFK's father. He made a fortune in the 1920s, bringing together groups of investors and then they would corner a stock and put out false information and since they had a corner, they could drive up the price and then once a rise in prices got other people excited, then they would dump their shares back on them. There was all this misbehavior in the stock market. That was perfectly legal back then, even though they were really taking advantage of vulnerable people. With that came the SEC and the punch line of the story is, you know who the first chairman of the SEC was? Joseph Kennedy.
Southwick: Same guy. [laughs]
Brokamp: What was FDR's quote about that?
Housel: I forget.
Brokamp: Something along the lines, if you want to catch a bank robber, you got to put him in charge, [laughs] something along those lines.
Housel: That was the other big thing besides the FDIC, was the SEC.
Southwick: As we're winding down here, what is your takeaway for investors? What's one good lesson from The Great Depression that our listener should takeaway?
Housel: There is a lawyer during The Great Depression named Benjamin Roth, who kept a really incredible diary. He was a lawyer, but he was an amateur investor too and an amateur economist, a really smart guy. His son published the biography, I think five years ago. It's called The Great Depression. A Diary. It's really fascinating just to see a layman's perception of what happened during the depression. He constantly writes about 1932, and 1933 he uses the same phrasing over and over again. He says, "Everyone knows stocks are cheap but nobody has any cash to buy them." He just talked about it all over the place. He says not just stocks, he's talking about buildings and real estate and his neighbourhood. There's a warehouse down the street that's selling for nothing, but nobody has any cash to buy it.
He writes about the sense of, all this opportunity that's lost and if anyone had any cash during that period, they can mint a fortune. There was just an opportunity laying right in front of them, but no one had any cash saved up. To me, I used to write a blog right about this quite a bit, when I was here at The Motley Fool. People really discount cash as an asset, when things are going well. Cash doesn't earn a good return. Why would you want to earn cash? Put your money to work, it's not doing anything for you. The value of cash is what it can do for you when things turn down and things eventually will, that's what you earn your return on cash and so I've always held more cash than I think any financial advisor would say is necessary, but that's why I do it and I think I'm earning a good return on my cash, I'm just not going to realize that return until things get hairy again.
Hill: As always, people on the program may have an interest in the stocks they talk about that The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow!
