The Investment Scientist

Posts Tagged ‘great depression

“This sucker could go down!”

That was what President Bush said during the recent $700 billion bailout plan meeting with congressional leaders at the White House. The market has gone down another 20% and talk of another Great Depression has filled the airwaves ever since.

If you are a listener of Jim Cramer, you would have heard his advice: Sell, sell, sell! He constantly reminds his listeners how the Dow went down 83% during the Great Depression; and never fully recovered until 1954.

Cramer forgot to account for dividends. If dividends from the Dow stocks were reinvested, then investors would have been able to recoup all losses by 1945. That’s a full nine years sooner! Think about this: what if investors held only high-dividend stocks? Would they have recovered their investments even sooner?

To find out, I examined the following four portfolios’ performance from 1929 onwards:

  1. Portfolio A: stocks with zero dividends.
  2. Portfolio B: stocks with bottom 30% dividend yields.
  3. Portfolio C: stocks with middle 40% dividend yields.
  4. Portfolio D: stocks with top 30% dividend yields.

All four portfolios peaked in August, 1929. With the exception of portfolio B, all portfolios bottomed in May, 1933. Portfolio B bottomed in June, 1933. For each of the four portfolios, the total peak-to-trough decline (drawdown) and the number months it took to recover are presented here:

Buy at the top and hold during Great Depression
A B C D
Drawdown 89% 86% 85.4% 84%
Months to recover 132 154 144 44

Data source: Kenneth French Data Library

It is probably not surprising that the highest dividend-yielding portfolio D fell a little less than other portfolios. It’s striking that portfolio D recouped all losses in just three-and-a-half years – eight to nine years before other portfolios.

Why did high dividend-yield stocks performed so well?

During the Great Depression, stock prices on average fell more than 80%. Dividends fell only about 11%. (See Chart below) As Yale University professor Robert Shiller has found, historically dividend volatility was about 15% of price volatility (meaning dividend declines were a fraction of price declines in recessions.) Stable dividend payments quickly made up for losses in price.

If the price gyration makes you dizzy, focus on dividends instead. They don’t gyrate and ultimately, they will sustain your retirement.

Get my white paper: The Informed Investor: 5 Key Concepts for Financial Success.


Since President Bush declared that if the Congress does not give Secretary Paulson the $700 billion blank check, “the sucker could go down!” the talks of another Great Depression have filled the air waves.

So how much today resembles the Great Depression that lasted from 1929 to 1933?

It doesn’t take a lot to bring together data from various government sources to present a comparison in the table below.

Table: Comparison of the Great Depression and today

Factor Great Depression Today
GDP growth -27% +1%
Unemployment rate 25% 6%
US exports -66% +15%
Inflation -27% +4%
Stock market -83% -43%

Data source:

Granted, the situation today could get a lot worse before getting better, it simply does not resemble the Great Depression. However, the stock market already have priced in half the chance of that.

Did President Bush and Secretary Paulson scare us so much, we not only handed over the $700 billion blank check, but we pee our pants as well?


Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.

Twitter: @mzhuang

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