Legend has it he saw the Great Crash coming. What would he be doing now?

THE JONATHAN DAVIS COLUMN

Jonathan Davis
Saturday 15 November 1997 00:02
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Given the great interest at the moment in drawing parallels between the decade leading up to the Great Crash of 1929 and the current bull market in shares, I have this week been taking counsel from one of New York's most legendary stock market investors.

Bernard Baruch was in his own way the George Soros of his day, a hugely successful speculator whose name alone had the power to move markets, yet who also found time to move in circles of power and play his part in the current affairs of his day. Baruch died in 1965 at the age of 94, but in addition to his millions, he left behind some fascinating thoughts on the subject of how to handle the pressures of stock market investing.

His experiences in the Great Crash were particularly interesting. At the time Baruch was in his sixties, successful in business and fabulously well connected. While continuing to play the market in large and bold manoeuvres, he had ceased to be a full-time market operator and sat as a director on a number of well-known companies.

Most of what there was to know about what was happening was his to know. Winston Churchill was just one of those who took advantage of visits to New York to take advice on what he should do with his investments. (Baruch in return contributed $100 to a fund to buy the future Prime Minister a Rolls-Royce).

Legend has it that Baruch was one of the few investors of the day to see the Crash coming: in his autobiography, he says he realised something was badly wrong with the markets while on a shooting trip in Scotland. In addition to baling out of stocks in time to avoid the worst of the crash, he implies that he also made a substantial amount of money by "going short" as well - that is, selling shares he did not yet own in the expectation of buying them back at a profit later. Although the bulk of his market gains came from riding bull markets, Baruch had always been an active short seller.

What made the Great Crash of 1929 so devastating was that it was actually a three-year bear market, not just the daily sensation that survives in popular legend.

The Dow Jones index did fall 13 per cent in one day in October 1929 (a smaller fall in percentage terms than October 1987), but the damage did not stop there. Between its peak in 1929 and the low point in July 1932, the market fell by no less than 89 per cent. The attrition, coupled with the fact that many investors were buying shares with borrowed money, was what eventually bankrupted so many.

Despite his public assurances, Baruch did not in fact survive the market's fall unscathed. As his biographer, James Grant, points out, when his secretary prepared an audit of Baruch's finances in November 1931, it showed that his total assets amounted to some $16m. This was a good deal less than at the peak of the market in 1929, when his net worth was estimated to be around $22m-$25m.

In a note to a politician friend at the time, Baruch confided: "I can tell you that the drop in my securities has been very severe, but I can still live in comfort and peace as I have done before. But I may not be able to help out in many of the directions I have heretofore, until the ship floats anew on the incoming tide, which of course it will do some time."

Although the records of his dealing activities are frustratingly incomplete, it is clear that the idea that Baruch cleaned up during the Great Crash was therefore no more than a popular myth. For all his connections, and his years of experience, the evidence suggests that he did not get out of shares in time to avoid the impact of the crash.

Even so, the breakdown of his assets at the time of his audit shows how successful Baruch was in avoiding the worst of the market's fall. In November 1931, according to his secretary's note, no less than half his money was in cash: $8m out of the $16m total. The rest was split more or less evenly between stocks and bonds.

Yet Baruch's private papers support the idea that he may have been more exercised by the market's fall than his public demeanour suggested. In a note he wrote to himself in 1930, he set out the qualities he reckoned it took to be a successful investor.

Top of the list he prepared was what he called "personal equipment", or what we might call today character. He listed six main decisive qualities: self-reliance ("do your own thinking"); judgment ("don't let what you want to happen influence your judgment"); courage; openness to new facts; prudence ("become more humble as the market goes your way"); and pliability ("Stubbornness as to opinions must be entirely eliminated", he opined, adding, "When you decide, act promptly, don't wait to see what the market will do.")

There followed a list of prices and economic indicators ("the facts") that Baruch reckoned it was worth following in trying to judge the level of the market.

Finally, he added a section on psychology, observing that nearly everyone is controlled by their emotions, and that people "become alternatively over-optimistic and over-pessimistic." His advice was: "Have an opinion on what the market should do, but don't decide what the markets will do." (In other words, don't try and fight the way the market is moving, since it will always overshoot one way or another).

And finally, he thought, "Always make allowances for chance - keep a financial and mental and physical reserve. Always reduce commitment if doubtful."

What would Baruch think of today's markets? History does not of course relate. His motto was the one I mentioned last week: "Cut your losses and then your profits". But he also had this advice for himself: "In general, run quickly." In other words, when you decide to change your stance on a market, do so decisively - and above all don't get caught financing deals with borrowed money. In today's markets, investors might care to take note.

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