wall_street_crash_of_1929 [CapiPedia]

This page is read only. You can view the source, but not change it. Ask your administrator if you think this is wrong.
====== Wall Street Crash of 1929 ======
The Wall Street Crash of 1929 (also known as the 'Great Crash') was the most catastrophic [[stock market crash]] in the history of the United States. It didn't happen on a single day but was a terrifying series of market plunges that occurred in late October 1929. The most famous days of the panic were [[Black Thursday]] (October 24), [[Black Monday]] (October 28), and [[Black Tuesday]] (October 29). On these days, panic selling wiped out billions of dollars in market value, equivalent to trillions today. The crash shattered public confidence in the American economy and is widely considered the event that triggered the decade-long economic catastrophe known as the [[Great Depression]]. For investors, it stands as the ultimate cautionary tale about the dangers of speculation, herd mentality, and ignoring the fundamental value of a business. It was the crucible in which the principles of modern [[value investing]] were forged.
===== The Roaring Twenties: Setting the Stage =====
To understand the crash, you have to understand the party that came before it: the [[Roaring Twenties]]. The 1920s was a decade of tremendous economic growth and technological innovation. Cars, radios, and telephones were becoming commonplace, and a giddy sense of permanent prosperity swept the nation. This optimism spilled into the stock market, which began a historic bull run.
Unfortunately, this bull market eventually detached from reality and became a massive [[speculative bubble]]. Ordinary people, from bankers to shoeshine boys, were swept up in the frenzy, convinced that stocks were a one-way ticket to riches. Two key factors fueled this mania:
  * **Buying on Margin:** This is the practice of borrowing money to buy stocks, known as [[margin buying]]. In the 1920s, investors could borrow up to 90% of a stock's price. This amplified both gains and, as it turned out, devastating losses. When prices fell, brokers made "margin calls," demanding investors pay back their loans immediately. This forced investors to sell their stocks at any price, causing prices to spiral downward.
  * **Investment Trusts:** These were precursors to modern [[mutual funds]], pooling money from many investors to buy a portfolio of stocks. While a good idea in theory, many of these trusts were highly leveraged and engaged in risky speculation, adding yet more fuel to the fire.
===== The Crash Itself: A Week of Panic =====
The bubble finally burst in October 1929. The market had been shaky for a few weeks, but the real panic began on Black Thursday.
==== Black Thursday (October 24) ====
The market opened to a wave of panic selling. The ticker tape, which printed stock prices, fell so far behind that investors had no idea how much their shares were actually worth. To stop the panic, a group of powerful Wall Street bankers, including representatives from [[J.P. Morgan & Co.]], pooled their resources and made very public purchases of blue-chip stocks. This temporarily stabilized the market and even led to a small rally on Friday. Many thought the worst was over. They were wrong.
==== Black Monday & Black Tuesday (October 28-29) ====
Over the weekend, investors had time to read the grim headlines and nurse their anxieties. The bankers' intervention was revealed to be a small-scale, temporary fix. When the market opened on Monday, the selling was even more ferocious. The [[Dow Jones Industrial Average (DJIA)]] fell nearly 13%.
This set the stage for Black Tuesday, the most infamous day in stock market history. The floodgates opened. A record 16.4 million shares were traded as investors dumped their stocks at any price. There were no buyers, only sellers. Margin calls wiped out countless investors. Fortunes built over a decade vanished in a matter of hours. By mid-November, the market had lost nearly half its value.
===== Aftermath and Lessons for Value Investors =====
The 1929 crash was a financial trauma that scarred a generation. It led to widespread bank failures, business closures, and soaring unemployment, ushering in the Great Depression. In response, the U.S. government enacted major reforms, including the [[Glass-Steagall Act]] to separate commercial and investment banking and the creation of the [[Securities and Exchange Commission (SEC)]] to police the markets.
For investors, the crash offers timeless lessons, particularly for those following a value-oriented philosophy.
==== The Perils of Speculation and Herd Mentality ====
The crash was the ultimate consequence of speculation—betting on price movements—rather than investing based on a company's underlying worth. The crowd was certain that prices would rise forever, a classic sign of a bubble. The father of value investing, [[Benjamin Graham]], lost heavily in the crash and learned from it. His seminal book, //[[The Intelligent Investor]]//, is a direct response to this folly, teaching investors to be business analysts, not market speculators.
==== The Importance of Margin of Safety ====
This is perhaps the most crucial lesson. A [[margin of safety]] is the principle of buying a stock for significantly less than your estimate of its [[intrinsic value]]. Think of it as building a bridge to hold a 15,000-pound truck but designing it to handle 30,000 pounds. That extra capacity is your margin of safety. In investing, it provides a cushion against bad luck, errors in judgment, or wild market swings like the 1929 crash. An investor who buys a solid business at a deep discount is far less likely to be wiped out by market panic than a speculator who bought a popular stock at an inflated price on borrowed money.