Given what's been going on in the markets I decided to re-read a little gem of a book by the great economist J K Galbraith: The Great Crash, 1929. It was published in 1954, and has been in print ever since. Not bad for an economics tome.
I came across it nearly 30 years ago, and in all the time since, it has never seemed more relevant than now. Perhaps the best of many insights and pieces of wisdom in the book is the observation that, just because "the fundamentals are sound," as the businessmen, bankers and politicians usually aver in times of trouble, that doesn't mean that the whole economic machine isn't about to collapse into recession, or worse.
In October 1929, when share prices started to fall, a process that continued for some years, there was no shortage of capacity of ability in the US economy. The problem was surely financial, and speculative, but that did not stop such monetary phenomena making their impact on the real world, and painful and ugly impact at that. Of all the misery and hardship that dogged America in the 1930s, the least was probably the plight of stockholders. For them, it was to take until 1954 for share prices to return to 1929 levels; leaving some allowance for price inflation, it was probably not until the presidency of Lyndon Johnson that investors from the Coolidge and Hoover eras began to see positive returns. Quite a wait, even by the standards of those of us who believe equity investing is for the long run.
I do happen to think that the framework the markets operate under now – legal, regulatory, informational, psychological, even – means that the circumstances of 1929 are unlikely ever to be repeated. The central banks of the world made some pretty grievous errors then, and the signs are that they are more than aware of what needs to be done now. So are governments – see President Bush's decision to help struggling American home owners re-mortgage and keep the roofs over their heads. So on that front I'm not too pessimistic.
Yet I do also think that the crunch in the money markets will affect share prices, as it already has, on and off since the present crisis began a few weeks ago. It is probably still very early days in terms of getting the credit markets back to normal; some big financial institutions will have to come clean about where the bodies of dead loan-backed assets are buried before everyone relaxes and starts lending to each other again. That will come to pass, if only because there will be external signs of their distress – in published accounts, in borrowings from central banks and so forth.
So what's the strategy?
As ever, carry on buying. The Wall Street investor who bought stocks doggedly from 1929 to 1932 would have started seeing some tidy returns before the end of that decade.
As ever, it might be best to try to stick to good "secular" growth stories; the sorts of companies that seem set to do well no matter what.
As ever, look for other equities that seem to be doing good business away from the turmoil.
One such example would be Rio Tinto, which, like the other miners, is sailing majestically past the banking chaos on its way to unloading yet another load of copper to the ravenous and insatiable Chinese market.
When I bought my last tranche of Rio Tinto shares at £28 or so I thought them a touch expensive. Still, I was persuaded that the Chinese boom would continue. A few weeks before the current market turmoil the shares had gone up by so much that I sold some for about £37 to "take profits" before I went on holiday. A nice quick buck. When I returned, the shares had collapsed to nearer £30 and I was regretting that I hadn't sold the lot. Now I note they're back up to £37 again.
Can the previous record of £40 be busted? It might be. Apart from the periodic takeover rumours, which are neither here nor there to the future of the business, frankly, there is this robust "growth story" coming from the Far East, and as I say, one that is apparently immune to the turmoil going on everywhere else. The shares are relatively expensive, but for the long term, when all the noises off have subsided, I can think of few better bets.
By the way, I ought also to mention that, in the short weeks since I last appeared in this space, Barclays bank hasn't collapsed and I wish I had followed my first instincts to buy into the crazy rumours circulating about it seven days back. Then again, I see my brave punt on Northern Rock has gone south again on some negative analyst comment. The turmoil continues...