“Really? The Top 10 Depression Stocks? Thats a preposterous headline.” Id guess thats what youre probably thinking.
But when I asked “Is This the Market Bottom?” on March 6 (it was a lucky guess), one striking piece of data came out of my research: Despite the conventional belief that the Great Depression was a terrible time to invest, investors who bought stocks in 1931 — just before a 71% market drop — would still have broken even in less than five years!
And stocks that the average investor bought after they became even cheaper — say, at the start of 1932 — would have multiplied in value more than 15 times during the next 22 years:
Some did even better And then there were the best Great Depression stocks — those that surpassed even these excellent long-term returns.
Despite our recent market run-up, the economy remains dicey — unemployment rates are still rising, rivaling what we saw at this stage in the Depression. So I decided to write this follow-up to my recent column profiling the top 10 stocks from the latest recession to see what lessons we can learn that would help our investing.
Sources: Center for Research in Security Prices at The University of Chicago Booth School of Business, in SmartMoney; Ibbotson Associates; and authors calculations.
While its tempting to conclude from this list that basic manufacturing stocks will lead us out of this recession, its not totally clear that this generalization applies, because manufacturing makes up a much smaller portion of our economy today.
Three of the top 10 Depression stocks — Electric Boat, Douglass, and Honeywell — were members of the defense industry. And if you dig a bit further into their histories, youll find that another five supplied the war effort or benefited indirectly.
1. Searching for todays “defense stocks” We shouldnt assume that defense heavyweights like Boeing and Lockheed Martin will repeat the performance of their Great Depression counterparts. At the height of World War II, defense spending as a percentage of gross domestic product was 10 times what it is now.
Instead of military spending, today the government is pouring billions into combating what Warren Buffett has called “an economic Pearl Harbor.” But the names of the top 10 Depression stocks suggest it wont be easy to predict which companies will benefit most.
Who would have guessed that International Paper, Zenith Radio, and Bulova Watch would begin selling the military ultrastrength shipping crates, bomb fuses, and aircraft instruments, respectively? It definitely wasnt obvious that the disruption of European paper imports would cause wood-pulp prices to spike, boosting paper maker Crown Zellerbachs earnings by some 30%.
Likewise, its not clear whether broadband upgrades will primarily benefit telcos like AT&T (NYSE: T) or smartphone makers like Research In Motion (Nasdaq: RIMM). Will the push toward electronic medical records help Quality Systems (Nasdaq: QSII), which performs such upgrades, or lower health-care costs for insurers such as Aetna (NYSE: AET)?
As during the Depression, there will be real beneficiaries of the governments response to this “economic war,” but the names of the top 10 Depression stocks suggest that it wont be easy to figure out who the primary ones will be.
2. The eternal recurrence I was surprised that not one financial stock even made the list of the top 50 Depression stocks! With about 9,000 bank failures between 1930 and 1934, I had expected shares of surviving banks to soar as they gained market share and restored their beaten-down valuations.
But a 1933 Federal Reserve study explained that the banking system, which had been growing faster than both the U.S. population and the overall economy for years, had been overbuilt to the point of declining profit margins and loan quality.
Like the 1930s, todays banking industry appears to be undergoing a massive correction after years of insane overbuilding. At its peak in 2006, financials made up an absurd one-quarter of the entire stock market capitalization. Returns on assets for many banks were below even withered 1920s industry levels, and housing is still in terrible shape.
So although we will probably see some big winners emerge from the beaten-down financial industry, it may not return to its former size, so there could be fewer big winners than many expect. If youre going to be investing in banks today, youll need to have a firm understanding of their liabilities, the strength of their assets, their business models, and their management teams.
3. Buy the best Many of the top Depression stocks had competitive advantages, which are especially important in a tough economy. They help retain business when customers are cutting back and ensure that the business can continue to operate profitably. Here are just a few:
How to invest during (and heading out of) depressions The list of the top 10 Depression stocks, along with the experiences of some of the worlds most successful investors (John Templeton, Benjamin Graham, and Warren Buffett), demonstrates that economic downturns can be a great time to pick up bargain stocks. It also shows that macro events can have surprising winners, so investing on that basis can be tricky. Finally, it teaches that companies with competitive advantages often perform especially well in uncertain times.
Our Motley Fool Inside Value team is seeing a number of companies with strong competitive advantages trading at bargain prices today. If youd like some help getting started, click here to see our favorite stock ideas free for the next 30 days.
Ilan Moscovitz doesn’t own shares of any company mentioned. Dolby Labs is a Motley Fool Stock Advisor recommendation. Coke and Paychex are both Inside Value and Income Investor selections. The Fool has one of the top 10 disclosure policies.
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In times of economic uncertainty, we’re all searching for financial liferafts The Great Depression serves as a powerful history lesson about protecting wealth when everything seems to be crumbling I’ve researched extensively to uncover which investments weathered that storm best – and what we might learn from those strategies today.
The Financial Landscape of the Great Depression
Let’s get real – the Great Depression was an economic nightmare unlike anything we’ve seen since. From its peak in September 1929, the Dow Jones Industrial Average plunged from 381.17 to a pathetic 41.22 by July 1932. That’s nearly a 90% drop! Investors who had their life savings in equities were devastated.
During this period
- Only about 8% of Americans owned stocks (mostly wealthy individuals)
- Many famous figures lost fortunes (comedian Eddie Cantor reportedly lost a million dollars)
- Even economic experts like Irving Fisher were ruined after falsely predicting stocks had reached “a permanently high plateau”
- Wall Street bigwigs faced disgrace (Richard Whitney, acting NYSE president, ended up in Sing-Sing prison for fraud)
Treasury Bonds: The Depression-Era Winner
If I could travel back to 1929 with my investment knowledge, I’d put my money in Treasury bonds. Here’s why:
While stocks performed terribly during the Great Depression bonds did surprisingly well. This wasn’t just a slight advantage – bonds delivered real returns of 6.04% during the 1930s while stocks languished.
The mechanics were simple:
- Interest rates and bond prices have an inverse relationship
- As deflation took hold, bond yields decreased
- Prime corporate bond yields fell from 4.59% in September 1929 to 2.94% by June 1938
- This falling yield environment created capital gains for bondholders
The Shrewd Wall Street Tycoons Who Saw It Coming
Two Wall Street tycoons managed to emerge from the Depression with “pockets full of money” – Alfred Lee Loomis and his partner Landon Thorne. Their strategy?
By early 1929, they had:
- Liquidated all their stock holdings
- Put their gains into long-term Treasury bonds and cash
- Completely avoided the market crash
While their peers struggled to survive, Loomis and Thorne “continued to profit handsomely” according to Jennet Conant, author of “Tuxedo Park: A Wall Street Tycoon and the Secret Palace That Changed the Course of World War II.”
Short-Term Fixed Income: The Reliable Alternative
For those who didn’t want to commit to long-term bonds, short-term fixed income securities (bills) were another solid option, returning a respectable 3.39% over the decade.
However, investors had to be selective. During periods of deflation and economic distress:
- Corporate defaults increase
- Municipal governments struggle to meet obligations
- Only the highest-quality fixed income securities offer true safety
Grandma’s Wisdom: Real Property and Tangible Assets
The article mentions a grandmother who survived the Depression who advised “keep working and hang onto whatever real property you can.” She “never believed in stocks, bonds, or anything ‘that I can’t see.'”
This perspective has merit. During deflationary periods:
- Cash becomes more valuable as prices fall
- Debt becomes more burdensome
- Owning assets free and clear provides security
However, property values also declined significantly during the Depression, so this wasn’t a wealth-building strategy so much as a survival tactic.
Depression-Proofing Modern Investments
If we faced similar conditions today, the best strategy would still prioritize:
- Default-free Treasury bills and bonds
- Very high-quality fixed income securities
- Minimal debt exposure
- Adequate cash reserves
It’s worth noting that the author of the article doesn’t believe we’re heading into another Great Depression. But preparedness never hurts.
The Deflationary Investment Playbook
Deflation fundamentally changes investment dynamics. In normal times, we expect inflation to erode the value of cash and fixed-rate investments. In deflation, the opposite occurs:
- Cash increases in purchasing power over time
- Fixed-rate debts become more burdensome
- High-quality bonds provide both income and capital appreciation
- Stocks struggle as corporate profits collapse
Beyond Financial Assets: Depression-Era Success Stories
Some of the most successful Depression-era wealth stories weren’t about traditional investments at all. They involved:
- Skills investment – People who could provide essential services remained employed
- Education – Those with specialized knowledge had better options
- Community connections – Social capital helped many survive through mutual support
- Frugality – Reducing expenses was often more impactful than investment returns
Common Mistakes to Avoid
During economic crisis, investors often make predictable mistakes:
- Panic selling at market bottoms
- Excessive leverage that can lead to bankruptcy
- Chasing yields without considering default risk
- Overconfidence in predicting market timing
My Takeaways for Today’s Investors
While we hopefully won’t face another Great Depression, the lessons remain valuable:
- Diversification matters – even in severe downturns, some assets perform better than others
- Quality becomes paramount during crisis – default-free investments outperform
- Liquidity provides options when opportunities arise
- Patience rewards those who can think long-term while others panic
The Psychology of Depression-Era Investing
The Great Depression wasn’t just an economic phenomenon – it was a psychological one. Many investors never returned to the market after being burned. The Dow didn’t recover to its pre-crash levels until 1954 – 25 years after the 1929 peak!
This created a generation of Americans who were deeply skeptical of financial markets. The grandmother mentioned in the article who only trusted “what I can see” represents this mindset.
Risk vs. Return: Depression-Era Lessons
The typical risk-return relationship was turned upside down during the Depression:
| Investment Type | Typical Risk Level | Great Depression Performance |
|---|---|---|
| Stocks | Higher | Terrible (heavy losses) |
| Corporate Bonds | Medium | Mixed (many defaults) |
| Treasury Bonds | Lower | Excellent (6.04% returns) |
| Cash/T-Bills | Lowest | Good (3.39% returns) |
This inverted relationship challenges conventional investment wisdom and reminds us that historical context matters enormously.
What This Means for Modern Crisis Investing
The 2008 financial crisis and recent economic challenges have revived interest in Depression-era investment strategies. While our modern economy has significant differences, some principles remain sound:
- Quality matters – In crisis, higher-quality assets typically outperform
- Leverage amplifies risk – Debt magnifies both gains and losses
- Liquidity becomes precious – Cash provides options when opportunities arise
- Preparation beats prediction – Having a plan beats trying to time markets
Final Thoughts: Balance is Key
The best investment during the Great Depression was undoubtedly Treasury bonds, which provided both safety and surprisingly good returns as interest rates fell. However, no single investment strategy is perfect for all economic environments.
A balanced approach might include:
- High-quality bonds for stability
- Some productive assets (like dividend-paying stocks) for long-term growth
- Cash reserves for emergencies and opportunities
- Skills development to maintain earning power
While we can’t predict the future, we can learn from history’s most challenging economic period. The investment winners during the Great Depression weren’t those who took the biggest risks – they were those who prioritized safety, quality, and patience during extraordinarily difficult times.
What’s your Depression-proofing strategy? I’d love to hear your thoughts in the comments!
How He Used The Great Depression to Get Filthy Rich
FAQ
What is the best asset to hold during a depression?
That said, it’s a question I’ve been getting more and more. The bottom line is that if we were heading into another deflationary depression the best assets to own are default-free Treasury bills and Treasury bonds, with some other very high quality fixed income securities thrown into the mix.
What stocks did well during the Great Depression?
Both Boeing and Chrysler made more money during the depression than they did before it. Chrysler went from a 9% market share in 1929 to a 24% market share in 1933. Proctor and Gamble also increased their sales during the depression. Several movie companies that specialized in cheap movies did well.
What were the best investments during the Great Depression?
The best performing investments during the Depression were government bonds (many corporations stopped paying interest on their bonds) and annuities.
Where is the best place to put your money during a depression?
- Saving Accounts. There’s a good chance you already have a savings account. …
- Money Market Accounts. A money market account is great for larger sums, offering significantly higher interest rates. …
- Share Certificates. …
- Stock Market.