Article Image

IPFS News Link • Economic Theory

Required Reading For Investors

•, by James Rickards

Many investors would say, "Sell everything, and wait until it's over!" That's almost never good advice.

In the first place, some assets perform well in crises, and you should hold onto those. Secondly, how do you know a crisis has actually started?

What seems like a crisis may just be a short-term bump in the road. And finally, how do you know when it's over? There were numerous 20% stock rallies during the Great Depression even as stocks were grinding lower over a three-year crash.

I'll tackle these specifics below, but I should point to an important aspect first: In any financial or market condition there are winners and losers. Diversification and timing are the keys to emerging as a winner.

Great Depression Made Fortunes

There are many famous examples of winning trades in recessions. Here are two of my favorites:

In the late 1920s, Joseph P. Kennedy (father of President John F. Kennedy), Big Mike Meehan and others formed stock manipulation rings. (This was before the passage of modern securities laws in 1933 and 1934 and before the creation of the SEC.)

They'd conspire to bid up the price of certain stocks, a process called a "ramp." This would catch the attention of retail buyers who would pile in and drive the price to ridiculous valuations. The insiders would then dump their stock at a huge profit and the stock would crash, leaving the retail suckers with the losses.

Kennedy put some icing on the cake by correctly seeing that the stock market was in a bubble by 1929. He shorted stocks ahead of the crash and made another fortune when the crash came in October 1929.

That 1929 crash was just the beginning. Stocks didn't hit bottom until July 1932 at which point they'd fallen over 80% from the 1929 highs. Kennedy lived through the Great Depression as one of the richest men in America and the Kennedy family fortune continues to this day.