Economics Experienced: A Hidden Gem from the Depression

Overview

I recently finished “The Great Depression: A Diary” by Benjamin Roth. Roth was a lawyer from Youngstown, Ohio, who lived through The Great Depression. It is a fantastic first-hand look at the depression and the devastating effects that war, currency manipulation, and personal leverage had on life. The book was copied from the personal diary of Benjamin Roth by his son, Daniel Roth. It is one of the best books I have ever read for understanding economics and how cycles affect the lives of average people.

Benjamin Roth was a lawyer in Youngstown, Ohio, from the 1920’s through the 1970’s. From 1931 until his death, Roth kept a personal journal where he frequently took note of events, observations, and his perspectives on the times. The book is a sequential compilation of his entries from 1931 to 1941. It gives gives readers a first-hand account of the causes and effects of The Great Depression.

Roth notes and discusses the currency crisis birthed by World War I, the resulting market euphoria and leverage of the 1920’s, Herbert Hoover’s failed attempts to keep the nation on the gold standard, the election of Franklin Delano Roosevelt and his “New Deal,” the market peaks and draw-downs of the mid-1930’s, and the ensuing war in Europe. His observations capture the difficulties experienced by families and businesses during this period, and the resulting shift in political and economic beliefs not previously held by the American people.

Lessons Learned

I took so much away from this book about economics. Thoughts on how market cycles repeat themselves to the hindsight of how to be best prepared for market downturns. *On a side note: It is uncanny how similar The Great Recession of 2008 was to The Great Depression. The correlation between current market optimism and that of the 1920’s, with people participating increasingly on leverage, is stunning. However, despite the economic observations and lessons to be gained, Roth explained, in hindsight, what I consider to be three foundational rules for all investors to practice on a personal level:

  1. Live below your means and accumulate capital, or cash reserves; especially when it seems that market optimism is highest.
  2. Be patient and only buy stocks when selling below their intrinsic value.
  3. Purchase income bearing, or dividend paying, stocks that can maintain cashflow output during downturns.

Any of this sound familiar? Maybe Warren Buffett mentions this from time to time…or almost every time he is interviewed! These are great rules to live by for new investors. They provide a great reminder for veterans.

Modest Living & Capital Accumulation

The benefits that capital accumulation, especially during optimistic times, can have are numerous. Most investors do not fully grasp the positive emotional and portfolio effects. Now, I am not advocating that investors should be 100% in cash, but making the decision to hold anywhere from 15% to 40% in cash during market highs helps you sleep well at night. It also prepares you to strike when the market experiences a severe downturn. Thus, allowing you to pick up shares of excellent businesses at excellent prices. Roth explains that not accumulating cash during the 1920’s prevented him from capitalizing on the opportunities presented. This error minimized the potential financial future he could have provided for his family. What’s the motto for the Boy Scouts? “Be Prepared.”

Patience & Opportunistic Investing

Patience is the the hardest ideal for most investors to exercise, myself included. Capital can all too tempting to deploy when markets are rising.  The feeling of missing out is a powerful force. I have been accumulating a cash position over the past few months despite the emotional push otherwise. Warren Buffett is a case study for how to be patient and invest opportunistically.  If you haven’t studied him, I highly recommend studying everything about his life and investing style.

Invest in Consistent Cash Producing Businesses

Now I understand that every investor is in a different phase of their investing life and buying dividend-paying stocks will not fit their current phase or strategy. However, the lesson I took away from this is that where you invest solely for income, capital appreciation, or both, you want to invest in businesses that have the capabilities to produce strong cash flows regardless of the market cycle. The cash flows of companies such as Coco-Cola (KO), Hershey (HSY), or Johnson & Johnson (JNJ) will be less affected by market downturns than companies like Ford (F), Union Pacific (UNP), or Wells Fargo (WFC). That doesn’t mean that the latter are not excellent companies. However, their ability to distribute cash productively may be constrained by cash flow reductions during draw-downs; something that does not affect the former as drastically.

Overall, Roth does an amazing job painting a picture of the effects that severe market draw-down has on normal people. The book is an amazing case study for understanding the mistakes investors made and how to be best prepared in the future. I always want to learn from other people’s mistakes and how they would have done things differently. How better than from someone who lived and learned during The Great Depression?

~ Holden Alexander


 

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2 Replies to “Economics Experienced: A Hidden Gem from the Depression”

  1. I have to admit having cash set aside when the market starts to fall is great. Although I’m a lousy market timer as I have thought the market was going to pull back multiple times. So clearly I’m not as good as I thought I was. But I keep telling myself that it can’t go up forever, right?

    1. Holden Alexander says: Reply

      I don’t think any of us are good market-timers. I believe that as value investors, when the market presents fewer and fewer opportunities to invest in, the cash position would build up by default rather than intentionally. Investors like Buffett and Munger hold large cash positions because they cannot find anything to invest in. It’s not intentionally. I would be interested to hear what value people are seeing today that is causing them to unload their cash positions.

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