The Great Depression: A Diary
Click here to buy the book.🚀 The Book in 3 Sentences
The Great Depression: A Diary is a first-hand account of what it was like living through the Great Depression through the eyes of the author, a lawyer from Youngstown, Ohio.
In the book, the author emphasizes the importance of preparing yourself for potentially devastating times and is a huge proponent of stockpiling cash for when downturns inevitably arrive.
Overall, Roth's diary serves as a timeless reminder of the resilience of the human spirit in the face of economic turmoil, offering invaluable insights for navigating uncertain times.
🧠 Key Takeaways
Never forget that what goes up can come down, and never put yourself in a position where the down periods (even substantially down) take you out of the game.
The best way to invest in stocks is with the goal of safeguarding your principal and getting a reasonable return over time. Still, many investors are drawn to speculative endeavors in pursuit of higher returns, often leading to disastrous consequences.
You never know what’s going to happen in the economy and in the world, so you need to prepare yourself for potentially devastating times, which come when you least expect it.
Don’t go overboard on your spending, don’t fall victim to “lifestyle inflation”, and don’t gamble it away on risky investments. Use your excess money to invest in high quality assets that will protect your principal and generate steady returns over the long-run.
Desperation can drive people to extreme measures. During the Depression, the circumstances caused many to stop thinking with clarity and reason, and it was all about survival over rational thinking. In such a desperate time, people were willing to do anything to improve their situation.
You NEED to prepare for inevitable downturns even when times are good. While you might not know the timing, duration, or severity of a downturn, you can be certain it will happen.
Most people don’t know how to analyze stocks because they don’t understand how to analyze a business. They don’t take the time to learn, and as a result, they end up gambling their money on positions rather than investing with patience and care. If they took the time to study the businesses behind the stocks, they would be much more successful.
Nobody can predict the future.
You don’t want to find yourself playing the other man’s game.
✍️ Memorable Quotes
“By summer of 1929 stocks were selling at twenty, thirty and forty times their earnings. Stocks were split and re-split until the most capable accountant would have found it difficult to make a reasonable calculation. All sense of caution was lost, stocks were bought blindly and good bonds earning 4% or 5% were sneered at. Even tho the air was full of warnings, very few people took heed and when the crash came in the fall of 1929 the casualties were terrific. Many of my friends with small earnings had run up stockholdings on margin as high as $50,000 or $75,000. The crash wiped them out and in many cases left them indebted to banks and brokerage houses. I visited a stock exchange on the day following the crash (my first visit to one) and the place was filled with perspiring and white-faced people. Suicide and bankruptcy became the order of the day.”
Thinking back to the Greed/Fear index, this sounds to me like the point of maximum greed.
It is only at this point—the point where “all sense of caution is lost”—that investors believe the market only goes up. There’s no way they’ll lose money (sarcasm).
This causes them to make risky financial decisions such as buying stocks at absurdly overvalued prices with large amounts of margin.
Never forget that what goes up can come down, and never put yourself in a position where the down periods (even substantially down) take you out of the game.
“Where can a person safely invest—in real estate, stocks, bonds? The constant supervision required by real estate, the costly upkeep, its illiquidity, the danger of a deficiency judgment—all have cooled me considerably. I begin to realize that changing business conditions and the growth of the country make almost essential a knowledge of stocks and bonds not for the purpose of speculation but to preserve principal and to get a fair return on the investment.”
Real estate has traditionally been viewed as a secure investment, often considered less volatile than stocks.
However, Roth's confidence in real estate diminished when he witnessed its vulnerability during the Depression. Real estate also has certain downsides that aren’t seen in stocks: constant supervision, costly upkeep, illiquidity, and the risk of foreclosure by the bank.
Recognizing the growth of the US economy and the expanding global footprint of its corporations, Roth now sees stocks and bonds as not just an option but a crucial investment.
What stands out to me in this quote is Roth’s view of stocks as more than just ticker symbols on a ticker tape, which is how most people of his time (and ours, actually) view them. Rather than looking at stocks solely through the lens of speculation, he sees them as representations of businesses, which was an idea made popular by Ben Graham in The Intelligent Investor.
He advocates for investing in stocks with the goal of safeguarding your principal and getting a reasonable return over time. I think this is how a lot of dividend investors try to invest as well.
Despite this advice, many investors are drawn to speculative endeavors in pursuit of higher returns, often leading to disastrous consequences. In 90-something years, not much has changed.
“In normal times the average professional man makes just a living and lives up to the limit of his income because he must dress well, etc. In times of depression he not only fails to make a living but has no surplus capital to buy bargains in stocks and real estate. 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. His practice suffers and he has no chance of rising above the level of the ordinary practitioner who lives from day to day and from hand to mouth.”
Preparedness > prediction.
You never know what’s going to happen in the economy and in the world, so you need to prepare yourself for potentially devastating times, which come when you least expect it.
The most effective way to prepare is by building a cash reserve. Having cash on hand allows you to cover your expenses, buy essentials, and seize investment opportunities during market downturns. Without this financial buffer, you’re defenseless against economic downturns.
The problem with cash though is that saving it is easier said than done. As Roth pointed out, professionals often spend their entire income (on necessities and frivolities, as well as frivolous necessities), making it impossible to build their savings.
The same problem exists today, and may actually be worse. With the rise of social media, there's an epidemic of comparing oneself to others, and there’s an extreme pressure to "keep up with the Joneses." This leads people to spend more freely to keep up appearances.
Overall, this underscores the importance of financial prudence and living within your means. You should aim to have ample cash left over at the end of every month to set aside for your future, and to prepare for unforeseen challenges. By doing so, you’ll have a much easier time riding out the downturns, and you’ll be able to do so with much less stress.
“This morning a client 65 years of age came into the office and we had a long talk about his personal affairs. He had been in the liquor business and in 1921 when Prohibition put an end to his activity he had accumulated about $200,000 in liquid cash. He is now broke except for some worthless real estate. He became a prey to high pressure salesmen of worthless stocks, tried one business after the other, speculated in real estate and in many ways tried to make more money quickly. We discussed 7 or 8 other men to whom the same thing happened. Not one was able to hold his money. They were good saloonkeepers but had not learned how to keep their money or to make it work for them. They knew absolutely nothing about sound investments and were not satisfied with a moderate return of 4% or 5%. I asked him what he would do again in the same circumstances. With tears in his eyes he said he would preserve and protect the principal at all hazards. He would invest safely for a small but certain return. On $8,000 a year, he could have lived well in Youngstown and he and his family would have had the peace of mind that financial security can bring.”
Many people are good at making money, but they’re terrible stewards of it.
In my experience, the people around my age who make a lot of money, often from online businesses, tend to blow it all on cars, watches, and extravagant vacations (see the above quote for my thoughts on why this is). This leaves little or nothing for investment.
Among the rare few that do have money left over to save/invest, they don’t want to put it in sound, stable investments. It’s too slow, and they’re too impatient. They would rather take a high-risk, high-reward approach, which is why so many end up just putting all of their money into Bitcoin (for better or for worse, depending on when they buy and how it’s trending).
In my opinion, this is not the right way to go about things. If you’re in a position to make a lot of money, you should make the most of that opportunity, especially considering you never know when it’s going to end.
Don’t go overboard on your spending, don’t fall victim to “lifestyle inflation”, and don’t gamble it away on risky investments. Use your excess money to invest in high quality assets that will protect your principal and generate steady returns over the long-run.
It’s not sexy, and it’s not Instagrammable, but it’s effective.
“As nearly as I can make out from a study of past panics, the cycle of business is always moving down toward a panic or up toward a boom. It rarely for long travels in a straight line. At the present time we are clearly moving down and the turn has not yet come. In the making of investments it would also seem wise to wait for some sign of the upturn before jumping in. It is impossible to hit the exact turn but as long as things are still definitely on the downgrade there would seem to be no hurry. When the final upturn does come it seems to me it will continue up for 8 or 10 years and culminate in a boom and a crash. The wise investor will disregard the day-by-day fluctuations of the stock market or real estate market and base his buying and selling on these long periods of rise and fall. Above all, and I repeat it again and again—he must have liquid capital in time of depression to buy the bargains and then he must sell before the next crash. It is difficult if not impossible to do this but the conservative longtime investor who follows the general rule of buying stocks when they are selling far below their intrinsic value and nobody wants them, and of selling his stocks when people are bidding frantically for them at prices far above their intrinsic value such an investor will pretty nearly hit the bull’s-eye. Among such investors are the Morgans, the Mellons and the Bakers. Their secret to a large extent lies in having liquid capital available and the courage to invest when things look the blackest. They say of Mr. Baker that he always bought good stocks when they sold below their intrinsic value and then held on until the cows came home. It seems to me he took very little risk.”
The idea of focusing on long-term trends and performance over day-to-day fluctuations still hold true today. It’s funny to see Roth, yet again, offering these callbacks to the Ben Graham approach of buying stocks when they are selling below their intrinsic value.
I wonder if he had read Graham’s work, or if he’s coming to these conclusions on his own. Based on the timeline, I wouldn’t be surprised if he knew of Graham. Although, this quote is from 1931, and Security Analysis wasn’t published until 1934.
“I am getting weary of depression talk and patent remedies. You hear it on all sides. The favorite remedy is repeal of Prohibition and the bringing back of liquor in the hope that a new industry will give employment and that real estate values will be stimulated. Then there is a great deal of talk about socialism and Communism and revolution. It all seems silly to me. Everything will work itself out without these radical changes. The depression has loosed all the radical thinkers who call themselves “liberals.” The true liberal and conservative has been silenced and is in disgrace.”
Desperation can drive people to extreme measures. During the Depression, the circumstances caused many to stop thinking with clarity and reason, and it was all about survival over rational thinking. In such a desperate time, people were willing to do try anything to improve their situation.
“Again and again I am forced to the conclusion that in prosperous times a man must be cautious and preserve his capital and be careful not to over-expand his business or to go too deeply in debt relying on a continuation of good business to pay the debt. In time of depression a man can be brave and if the depression is nearing an end he can invest his money or expand his business or open a new business with confidence that he is facing 5 or 10 years of prosperity. He can feel sure that the road ahead will be up not down. Many great prosperous businesses were founded on the ruins of depression.”
In times of prosperity, it's easy to forget that downturns can occur. However, boom and bust cycles are what make the world go round, and as Tom Petty said: What goes up must come down.
You NEED to prepare for inevitable downturns even when times are good. While you might not know the timing, duration, or severity of a downturn, you can be certain it will happen.
During prosperous periods, take advantage of the opportunity to prepare for these future downturns. Doing so not only makes navigating tough times more manageable but also positions you to seize market opportunities that can be transformative.
On the other hand, neglecting to prepare can lead to significant struggles during downturns.
“Talked to W. W. Zimmerman today. He said, “This is the most puzzling period of my life. I can’t understand things. Everything that I thought was right is now proving to be wrong.” And the same thought is in the minds of other thinking people. All sense of value, optimism and initiative seems to have disappeared. That is why the depression period presents so many opportunities to the man who has the nerve to buy stocks and real estate and businesses when the outlook is the blackest.”
Going into a depression—or any economic downturn—you want to be prepared with “ammunition” to deploy when share prices are at their lowest. While this is the point of maximum pessimism, where “all sense of value, optimism, and initiative seems to have disappeared,” and it's also the prime opportunity to purchase assets at their most affordable prices.
“Judge Griffith said to me today: “I was a young man when the panic of 1873 occurred and I can remember how my father after that always insisted that government bonds were the only real safe investment and were a necessary part of every investment list. In my law practice in later years I found that other successful men who lived thru the panic of 1873 felt the same way. One particular client, a successful steel executive, always held $100,000 in government bonds out of a total estate of $250,000. His theory was that he could always live on the interest from the bonds no matter what happened to the rest. Now that I am experiencing the 1929 panic I can see how those men felt and I now agree with them. Banks and large corporations will continue to fail in great crises but our ultimate faith must be in the government.”
Government bonds are considered the “only real safe investment” because government bonds have traditionally been seen as “risk-free.” The underlying belief is that the US government could never default or go bankrupt, but these days, I’m honestly not so sure.
The growing deficit is definitely not sustainable—that’s pretty clear to see, even for a layman—and their interest expense is growing at a rate that’s out of control. Unless they change their spending habits, a default or bankruptcy—or something—seems inevitable. They can’t keep going on like they have been.
So with that said, I don’t personally think government bonds are as “risk-free” as many would like to believe. And I think that given the current trajectory, they become more risky as time goes on.
“In looking back it is interesting to note that expansion of business during a boom is a mistake. The time to expand is at the end of a panic when the economic cycle is headed up again. In 1928 professional men rented larger offices and bought bigger homes business men established chain stores, etc. -mergers took place Warner Picture Co. built a million dollar theater in Youngstown etc. In almost every instance this expansion proved to be a mistake. On the other side of the picture it is interesting to note that the Strouss-Hirshberg Co. was started in 1875 after the panic of 1873 and prospered. Herman Ritter tells me he started the Ritter-Meyer Co. just after the panic of 1893 and prospered. He was also far-sighted enough to give up his business just when the present panic started. It is my judgment that in another year or so the time will be ripe to found new enterprises on a conservative basis and then expand slowly as the economic cycle again moves upward.”
In other words, it's best to go on offense and expand when you have the economic wind at your back. When the economy is growing, it's a good time to be proactive and focus on growth.
On the other hand, if the economy is contracting, a defensive approach makes more sense. In such downturns, survival is more important than growth.
“It is my conclusion that the successful investor must cultivate the habit of “patience.” He must be able to hold his money and wait until it is really the time to buy. In this panic it meant waiting over 3 years until stocks were really at rock bottom and selling at less than 1/10 of their normal value. I suppose the real investor would then have the patience and courage to wait until normal times returned before selling. Patience to wait for the right moment—courage to buy or sell when that time arrives—and liquid capital—these are the 3 essentials as I see it now.”
While I don’t disagree with what Roth is saying here, I also believe the benefit of hindsight makes it easy to conclude that one should wait until the stock market is at a rock bottom to buy—as if one has the capacity to detect when that is.
That being said, while I'm not entirely sold on applying this strategy to the entire stock market, I do believe it holds merit for individual companies.
Let’s look at Starbucks, for example. When its stock was hovering in the $90 per share range, many investors held back, waiting for a better opportunity. Lo and behold, the stock ended up taking a nosedive, plunging into the low $70s (and experiencing its most significant single-day share price drop ever) following their worst quarterly earnings report in years.
Here, the patient investor was rewarded. Hopefully, they had the courage to buy the dip, and had the liquid capital to do so.
I sure did. Since the drop, I’ve been buying shares of Starbucks every week.
That said, Roth's idea does make me think about keeping some funds on standby in case of a major market downturn. Perhaps setting aside $25 or $50 per week in a savings account or money market fund would be a good idea, ensuring I have some ammunition in reserve if a widespread crash were to materialize.
“This depression has indelibly impressed on my mind one thing and that is the value of having on hand sufficient capital to cover emergencies. In the investment field it means the difference between success or failure to have enough capital to buy bargains when they are available or to hold on to investments thru thick and thin and not be forced to sell at a loss. 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. Even in domestic life there can be no happiness without sufficient surplus to cover emergencies such as illness or death. And yet knowing these things it takes infinite patience for a young man today without financial backing to lay a sound foundation.”
As they say, cash is king.
I probably hold WAY more cash than I should, but doing so helps me sleep better at night. As my cash position grows, I can actually feel the difference in my stress levels. I’m much more relaxed, and much happier knowing I have some financial cushion. Without that, I can be extremely short-tempered and generally not fun to be around.
Because my income fluctuates every month, I want to make sure I have plenty of cash to hold me over in case of an emergency, or in case I go through a dry spell with my earnings. At this point, I can’t imagine why that’d happen, but anything’s possible, so I want to be prepared.
“Somewhere in between the ultra-conservative man who is afraid to take even a legitimate risk and the avaricious gambler who bets on anything stands the ideal investor who has learned to make his money work for him. He accumulates money first by savings then he carefully investigates and weighs a dozen investments before he finally selects one to put his money in. He is willing to take a legitimate risk but is not willing to gamble. If he invests in real estate or mortgages he first examines the property the neighborhood, the future development and will probably have it appraised by experts. He investigates thoroughly before he buys. Such a man with ordinary business judgment will usually make a profit on his investment. Not much perhaps on each individual investment but in the end he will accumulate and as the pile grows he will find many bargains offered him because he has capital to invest. It he invests in stock or bonds he will not follow blind tips or rush into a seething market with thousands of suckers—but in the quiet of his office he will carefully examine the earnings records of the company, its future prospects. He will seek advice if necessary and then buy only if he thinks the price is fair and the prospects good. He will hold on for several years and share in the growth of the company and will sell only if the company loses ground or if a stock-crazy public offers him much more for his stock than its intrinsic value.”
I thought this was a great explanation of the “ideal investor.” As Charlie Munger would say: “Nothing to add.”
“The average man who buys real estate for investment makes a careful study of the property, the location, the income, etc. and hires a lawyer to examine the title. He then expends a lot of time and energy to collect rents, make repairs, etc. At the end of 10 years if he can say that his investment shows an annual return of 6% and then a reasonable capital profit when he sells, then he will consider that investment a success. That same man when he buys stocks either will not investigate because he does not know how or because he is lazy. He bets his money as in a horse race and does not feel his venture a success unless his money is doubled in a very short time. If the patience and care used in a real estate investment were used in making a stock investment, there would be much greater chance of success.”
People often forget that stocks represent pieces of living, breathing businesses. Instead, they just see them as 3 or 4 letter ticker symbols that move up and down without any apparent rhyme or reason.
Most people don’t know how to analyze stocks because they don’t understand how to analyze a business. They don’t take the time to learn, and as a result, they end up gambling their money on positions rather than investing with patience and care. If they took the time to study the businesses behind the stocks, they would be much more successful.
“As I re-read some of the predictions made by outstanding economists in past few years, I must laugh. They were all wrong.”
It was just as true then as it is now. Nobody can predict the future. This is why I try to avoid making predictions about the broader economy.
“His brother was the owner of an amusement park and quite prosperous. Owned a small summer home in Florida which cost him $2500 long before the Florida land boom. Sold it for $75,000 during the 1925 Florida land boom—then got land speculation fever—moved to Florida and lost everything. He knew the amusement business and made money in it. He knew nothing about real estate speculation and was playing the other man’s game.”
I thought this was an important story about staying within your Circle of Competence. You don’t want to find yourself playing the other man’s game.