Book Review: The Great Depression, A Diary (or why buying low is so hard)

Benjamin Roth was a young lawyer living and working in Youngstown, Ohio during the Great Depression. In June of 1931, just over 19 months after the calamitous stock market crash in late October of 1929, Roth started journaling his thoughts about the stock market, banks, his law practice, politics, and investment opportunities.

After the stock market crashed in 2008, Roth’s son, Daniel, knew it was time to honor his father’s memory by publishing his father’s writings. The timing was right, and although we are now 8 years removed from the stock market lows of 2009, Roth’s accounts of the Great Depression refreshed my thoughts of our most recent economic catastrophe.

The importance of this book

Beware the danger of hindsight bias. Here’s the definition:

 “the inclination, after an event has occurred, to see the event as having been predictable, despite there having been little or no objective basis for predicting it”

It is a near impossibility to keep our hindsight bias from kicking into gear when examining historical events. Our bias often leads us to overconfidence, luring us into making decisions for the wrong reasons, possibly damaging our lives and our loved ones along the way.

That is exactly why Roth’s personal account of the events and people of the 1930s is so valuable. When considering the Great Depression, I have been quick to make judgement on how leaders, business people, and families should have reacted if they would have only kept their calm and made rational decisions.

I can’t say how representative Roth’s reactions to the Depression were of all who lived through it, but he is proof that there were people able to keep their emotions in check while the economy was collapsing around them. Roth’s dispassion is remarkable, especially considering he was responsible for providing for his wife and 3 young children during that time.

But Roth was not without reasons for hope even during dire economic times. He was an educated professional, and as an educated man, he had knowledge of history to rely upon.

Most historical market charts used today start in the 1920s which causes the history of markets before the 20s to be downplayed, if not forgotten.

However, Roth had a high awareness, not only of the stock market and investments in the 1920s, but also of economic recessions in the United States prior to the Great Depression. Roth didn’t even own stock when the Great Crash hit (only 2.5% of Americans did), but he was highly aware of stock markets happenings and history.

Roth often references the crashes and recessions of the 19th century, and uses them to forecast the length, severity, and opportunity of the Great Depression. Many of his predictions are far off (just like everyone else’s of that time…and today). But many of his insights were remarkable. The richest part of Roth’s diary is his predictions of the  future and the later comments he made about his predictions and whether they were right or wrong or very wrong.

But therein lies the tragedy of Roth’s diary: he had fantastic insights and admirable emotional self control, yet he was still unable to take advantage of the investment opportunities the Depression offered. In fact, only an elite class was able to take advantage of the rock bottom asset prices because only they had surplus income/capital after they made sure they could provide for their families.

Why buying low is so hard

Starvation is not a threat in 21st century United States, and it likely wouldn’t be even if another depression hit. But the same dilemma that kept Roth from taking advantage of panic prices in assets in the 30s still keep people from doing the same today. Why is that?

The dilemma is that the only time assets lose significant value is when the economic stability of the future is jeopardized and uncertain. It’s at that moment when a working family can’t rely on their ability to earn an income, because their business may dry up or they may be laid off. So instead of looking for investment deals, a family pays off debt to lower their risk, or they increase their savings, or they use all they have to buy necessities. And the opportunity of a lifetime drifts by.

However, hindsight bias kicks in again. If we truly knew the opportunity of 1932 or 1939 or even 2009, there is no doubt we would have made some radical choices to get any assets we could invested in the stock market or other assets like real estate. But in the midst of those times, investing looks like foolishness, not opportunism.

Most discouraging about those missed opportunities is that even when someone recognizes the opportunity and has the resources to take advantage of the opportunity, it’s still not certain they’ll profit!

Roth tells the story of a friend who had the wherewithal to buy 1000 shares of Warner stock in 1935 for 3 ⅛. The stock went to 18 in two years turning a approximately $3,000 investment into $18,000.  Instead of selling out, his friend borrowed money on margin to buy more stocks. The crash of 1937 came shortly after, and his friend lost everything. Even someone who maintained the optimism to invest got taken down by the market…if only he had not borrowed to invest.

Lessons for today

Roth comments often on the dangers of borrowing money to invest in anything. Sure, in a rising market it makes an investor much more profitable to borrow to invest. But markets have never, ever sustained their rises indefinitely, and at times, you get entire decades when the market crashes frequently, decimating anyone who has borrowed to invest. Roth claims that every single person he knew who had borrowed to invest was wiped out in the 1930s.

Roth became a student of investing during the Depression, and he shares a lot of his education in his diary. Most of this investment advice is very conservative in nature, but an ultra conservative investment strategy is the only way investors didn’t lose their shirt in the 1930s. Today, many people are comfortable taking considerably more risk than Roth would recommend in the late 30s. And if we never hit another depression like the Great one, then it is a wise strategy.

But is it a guarantee that we won’t hit another depression as long and deep as the Great Depression? Absolutely not. However, is it even remotely likely? That’s where the real debate lies. Much has changed since the 1930s. Our financial system today is much different from the system of Roth’s time. Perhaps we have the mechanisms to avoid another depression…or perhaps it’s arrogant to think we are different from those in the generations before us.

And that to me is the greatest value of this book. Although we live in very different times, we are not so different than the generations before us. We can learn from what they went through, but we cannot claim we have a superior enlightenment that will protect us from all catastrophe.

We have to live and make decisions in humility, recognizing our own naivety and limitations. If we do so, we still may fall victim to the disruptive forces of this world, but we will have the strongest defense available to us: the willingness to educate ourselves.

Recommendation

I can’t recommend this book to every reader. Roth’s inclination to make investment strategy a major theme of his writings will bore and disengage many. To those who enjoy investment insights and the stock market, Roth’s book, along with editor’s James Ledbetter’s insight, are guaranteed to entertain and educate.

If you don’t fancy stock talk, I don’t recommend this book. However, it is essential that everyone spend time educating themselves about the Great Depression to 1) learn to be thankful for the era of plenty in which we currently live, 2) to humbly recognize how vulnerable the complex systems around us are, and 3) to have a basis for how to react in the case we go through something similar…or worse.

No matter what lies ahead of us, ultimately, if we understand the true nature of this world…the best is yet to come.

My old 401(k): Here’s what you really need to know

You have an old 401(k) (or other company retirement plan) your former employer is telling you to do something with or you feel is hanging out there aimlessly. You need to “take care of it” one way or another.

It’s the #1 reason people reach out to me as a financial planner. It’s also the exact situation financial advisors seek to prey upon because it’s the easiest way to gather assets on which to make a fee or commission.

That leaves you, holder of the old 401(k), in a tough spot. You want to get closure on this account, but you don’t know how, and you don’t know who to trust to help you figure it out. There is no clear path ahead. It’s a crummy feeling.

In 5 minutes, let’s clear your path so you’ll know how to handle your old 401(k).

First, you don’t have to do anything with the old 401(k). You can leave it there if you’d like.

Is that the best decision? It depends. Worst case scenario is the plan provider will boot you out, send you a check for the proceeds minus tax and penalty withholdings. Those withholdings won’t be a lot in dollar terms, because providers usually only boot you out of the plan if your balance is small (usually $5,000 or less).

So what would it look like just to leave it where it is? Why would you do that?

Old 401(k)s may afford you benefits you can’t find anywhere else. There are a few benefits to look out for. First, do you have company stock in this plan? If yes, you have to consider your long term tax plan. The retirement plan structure gives you options with how to treat that stock in the most tax efficient manner possible. How that works is beyond the scope of this post, so get professional help if you own a lot of company stock (more than 5% of your net worth).

Second, does your old 401(k) offer you access to investments no other plan or provider can? Some company plans have negotiated some sweet investment options, most commonly a stable value or guaranteed fund that pays a more robust interest rate than relative alternatives.

Finally, by moving the old 401(k), will it be subjected to new expenses and fees? As mentioned earlier, the financial advising sales force is always interested in folks moving old 401(k)s so they can make a sale.

But that doesn’t mean leaving it is your best choice because…

Your old 401(k) may be awful. Awful would be defined by three factors: high costs, poor investment selection, and shabby service/user interface.

High Costs

How do you know if the costs of your plan are high? First, know what you’re looking for. The costs most commonly assessed on you are fund expenses (expressed as an expense ratio), advisory fees, and recordkeeping fees.

Next, login into your old 401(k)’s online account access (if you don’t know how, reach out to the HR person in your old company), then within the website, find the Summary Plan Description. It should be available to you in PDF format.

Once you’ve opened the PDF, do a CTRL+F (or COMMAND+F) to pull up the document search and try using any of the following terms: fees, expense(s), commission, charges. That should lead you to the content you’re looking for to determine what costs your old 401(k) levies. If it doesn’t, keep searching the website, the information is likely there. Still no luck? Call the customer service # to get help. Information on costs is too important to remain naive.

Crummy Investments

How do you know if your plan has poor investment selections? This is tough, because everyone’s investment preferences are different depending on their perceptions, experience, beliefs,  and risk tolerance. Very generally and simply speaking, I’m looking for low cost, highly diversified options in stocks and bonds. That is enough for me to have confidence an investor can be successful.

No engagement

Finally, you’ll know if your old 401(k) has shabby service or a complex user interface by answering this one question: is it difficult for you to access, get information on, and make changes to your retirement plan? If you’ve tried to work with your old 401(k) and you find any of that to be true, then you need to simplify by moving the account.

If there is a high risk your old 401(k) will fall into your “out of sight, out of mind” mental category, neglect could wage a high cost, and you should move it. Change happens in life and these assets may need altered in response. But you’ll never know if the old plan is basically abandoned as an afterthought.

There lies the single most powerful factor in deciding what to do with your old 401k. It needs to be in a place where it can empower your decisions today. However many assets you have in the account, they should be aiding in your pursuit of the most important matters in life, whether now or in the future.

Alright, I need to move my old 401(k), what do I do?

Let’s say for any of the reasons above, you’ve decided you need to rollover (the technical term for moving your account) your old 401(k). You’ve got a couple more questions to ask yourself: How capable are you to find a solution without paying for help? And if you’re not capable, where’s the best place to turn?

If you have financial savvy and some time to dedicate the required work and enjoy working with your assets, then you do not need to pay for help. But those three factors found together are rare.

Even if you don’t have all those working for you, you’re still not without options. In fact, your most simple, cost effective option is to open an IRA account with Vanguard (whom Warren Buffett recommends). Vanguard has a customer service force ready to guide you through your next steps (beware though, some customer service folks are more helpful than others).

However, you are likely part of the 90% (that’s a guesstimate) of people who would gladly pay for some personalized guidance on your old 401(k). It’s great when you can take the burden off yourself. You may not have the confidence, the time, the energy, or the focus to make the right choices with your account.

Then I have no hesitation recommending you find and pay for professional help. My only plea is this: know how you’re paying for the advice and know your alternative options. If you do those two things, you will be able to find professional, knowledgable help with your retirement plan account.

Okay, so it’s not simple to make a confident decision with how to handle that old 401(k), but by going through the progression I’ve listed above, you’ll gain the confidence this account is in the place that’s best for you.