Q&A: The Lessons of 1929, Gold as a Hedge…and More

Boy, when a crisis hits, I sure get a lot of mail.

In recent days, amid the pandemic panic, I’ve received a spike in reader emails, mostly with nervous questions about the coronavirus-induced stock market crash. Readers are hungry for advice on how to cope with the worsening crisis.

As of this writing Wednesday morning, U.S. stocks were poised in pre-market trading for yet another sharp sell off, as investors continued to worry about the pandemic’s effect on the economy and corporate earnings. An economic stimulus plan floated yesterday by the federal government failed to impress Wall Street.

As the pandemic spreads and stocks plunge, what moves should you make now? For insights, let’s dive into today’s reader Q&A.

Wall Street lays an egg…

“What can the crash of 1929 teach us today?” — Tom K.

For perspective on the current market panic, let’s take a quick look at the fateful year of 1929, its consequences, and a few of its lessons.

The Great Depression began in 1929 when, in a period of 10 weeks, stocks on the New York Stock Exchange lost 50% of their value. As stocks continued to fall during the early 1930s, businesses went bankrupt, people lost their jobs and homes, and unemployment rose to nearly 25%.

The first day of the prolonged stock market crash was October 24, 1929, aka “Black Thursday.” Five days later, on October 29, another crash occurred known as “Black Tuesday.”


Leading up to Black Thursday was unbridled investor euphoria. Bernard Baruch, financial advisor to President Franklin Roosevelt, described the atmosphere immediately before the crash of 1929:

“Taxi drivers told you what to buy. The shoeshine boy could give you a summary of the day’s financial news as he worked with rag and polish. An old beggar who regularly patrolled the street in front of my office now gave me tips and, I suppose, spent the money I and others gave him in the market. My cook had a brokerage account and followed the ticker closely. Her paper profits were quickly blown away in the gale of 1929.”

Baruch was the investment guru of his day. He sold his stocks just before Black Thursday. He made a fortune. He once said: “I made my money by selling too soon.”

A few months before the market plunges of 2020, I consistently warned you that stocks were overbought and faced a day of reckoning. That day has arrived. If you’ve been following my advice (take profits from overvalued momentum stocks, elevate cash levels, increase your exposure to hedges, etc.) then you’ve been able to substantially mitigate the pain of recent days.

When stocks were hitting new highs and politicians were bragging about the bull market, I recommended caution. I advised you to take at least partial profits from your biggest gainers, even as stocks were still rising, because equities were severely overvalued and trying to time a market top (or bottom) is a risky game.

There’s panic buying when a market is soaring (i.e., Fear of Missing Out) and there’s panic selling when a market crashes. Bernard Baruch knew this and acted accordingly. He died a wealthy man.

As I’ll explain below, markets always bounce back and you can still make money, even under the current crisis.

When cash comes in handy…

“I just wanted to say I’ve been reading your newsletter regularly for the past couple of years. One of the themes you have been harping on for a long time is that the stock market is overvalued, and investors would do well to elevate their cash levels.

Thankfully, I positioned 50% of my brokerage accounts into cash many months ago, so this recent downturn in the market has not affected me as much as others. I actually used half of that cash to short the market about 3 months ago. I was able to easily exit that position at a 10% profit last week. I know you don’t advocate shorting the market, but your letters most definitely got me thinking that I needed to have a large cash position because the market was (historically) overvalued.

I am well positioned to take advantage of the sale prices on stocks today, and I would have to say the primary influence on my decision making process was your letters. Many other ‘experts’ out there have been advocating how the market is going to continue to rise and it’s best to stay invested. While I agree that’s probably true over the long term, I also believe it’s wise to scale back your holdings when the market is overvalued, especially because when a pin pricks the bubble, the prices come crashing down with a vengeance. Thank you. God Bless and keep up the good work.” — Brian H.

Glad to be of service, Brian. The crash this year certainly has been ugly. “Beware the ides of March” are the famous words spoken in Shakespeare’s play Julius Caesar, warning the titular character of his assassination. The murder of Caesar took place on March 15, 44 B.C.

Roughly speaking, “ides” is Latin for middle of the month. This year, mid-March has been unlucky for investors, too. You might say the Dow stabbed us in the back (see chart).

The yellow metal shines through…

“Please show me how to make my portfolio balanced and defensive in case of further declines.” Sarah G.

You’re right to worry about additional market sell-offs. Weak corporate earnings growth, geopolitical turmoil, sputtering global growth, and economic damage from the coronavirus pandemic continue to pose serious threats to risk-on assets.

At least 25% of your portfolio should be devoted to hedges. As part of your hedges sleeve, about 5% – 10% should be in precious metals, such as gold and silver.

Read This Story: The Midas Method: Why Gold Shines Now

I prefer gold mining stocks to physical bullion or funds. To find out why, click here for our special report on gold. Our report pinpoints an exciting small-cap gold miner that’s on the verge of explosive gains.

Recession in the wings…

“Do you think the coronavirus will spawn a recession?” — David K.

Before the coronavirus epidemic gathered steam, analysts were warning that China and Europe were heading toward economic slowdowns. Now the prognosis has worsened. The economic damage wreaked by COVID-19 makes a recession around the world (and on American shores) highly likely.

The abrupt halt to a wide variety of economic activities already has taken its toll on corporate earnings and stock prices. Central banks are hamstrung in their efforts to prevent the downturn, largely because interest rates already are at rock bottom.

Besides, cheaper credit doesn’t do much good if consumers are quarantined. Robust consumer spending was a pillar of the bull market. That pillar, and the bull market, are now gone.

That said, you can still invest profitably during a bear market.

Read This Story: How to Fight the Bear…and Win

Don’t sell good stocks in a panic. If your portfolio is properly diversified, you can sit tight and ride out the storm.

Stick to your goals…

“The markets have experienced extreme volatility lately, with 1,000-point swings in the Dow from day to day. Investors are getting whipsawed by coronavirus news. How should we respond?” Alex Z.

Crashes come and go but over the long haul, the stock market always recovers. Stocks recently took a beating and they’ve been on a roller coaster. Through it all, stick to your long-term goals.

Keep your perspective. Out of the rubble of the Great Financial Crisis of 2008-2009 began the longest bull run on record. The bull market began on March 9, 2009, when the S&P 500 closed at 676, the bear market low. (The bull died this year, a few days after its 11th birthday.)

Or consider more recent history. After coming within a whisker of a correction in December 2018, the stock market soared to one of its best years in decades. The S&P 500 returned 31.5% in 2019, including dividends. Always keep a diversified portfolio, with bonds as ballast.

Questions about crisis investing? I’m here to help: mailbag@investingdaily.com

John Persinos is the editorial director of Investing Daily.