Understanding Stocks

WHERE TO BUY STOCKS 65
ways was eerily similar to the boom and bust cycle that the stock
market went through beginning in March 2000.
It wasn’t the Internet that fascinated the nation and helped
usher in the roaring 1920s, it was electricity. At the same time,
many people became enamored with the stock market. With very
favorable margin rates (you could borrow 9 times the amount of
your original investment), it seemed as if everyone was in the
stock market. As more and more people entered the market, the
prices of stocks went up. (In a way, it was like a huge Ponzi
scheme. People paid off what they owed on their original investment
with the paper profits they made on their rising stocks.)
The attitude of the Coolidge administration was laissezfaire,
a French term meaning “letting things be.” The government
wanted to let the forces of capitalism work without interference.
As the stock market got shakier and the economy got worse, the
new president, Herbert Hoover, realized that something had to be
done. The goal was to increase margin requirements (which
many considered the main culprit) without causing panic. Unfortunately,
the market panicked.
After a series of frightening stops and starts, the market finally
crashed on October 24, 1929. Over $10 billion of investors’money
was wiped out before noon. Huge crowds of angry and shocked
investors packed the visitor’s gallery of the NYSE to watch the
debacle. By noon the market was in a “death spiral.” Investors
around the world were horrified at the extent of the financial damage.
By October 29, 1929, all the market’s gains from the past year
had been wiped out. Eventually, the market fell 89 percent from its
1929 high of 381.
After the crash, economists tried to figure out what had gone
wrong. It was obvious that many people had missed the signs the
market was overpriced. For example, the P/Es of many stocks
were high, well beyond what was considered the P/E safe zone of
15. In addition, the Fed decided to raise interest rates, which
many economists considered to be the wrong move. Congress
also had a hand in turning what really was a recession into a fullblown
depression. For example, during this period it doubled
income taxes and raised tariffs on imports and exports.