Benjamin Roth: The Great Depression

This depression has indelibly impressed on my mind one thing—and that is the value of having on hand sufficient capital to cover emergencies. In the investment field it means the difference between success or failure to have enough capital to buy bargains when they are available or to hold on to investments thru thick and thin and not be forced to sell at a loss. My experience as a lawyer shows that a large proportion of business failures are caused by lack of capital rather than by lack of technical business knowledge

It is said about the wealthy banker George F. Baker of New York:

1. He always bought sound stocks and bonds when they were offered below intrinsic value.
2. He always had liquid cash for such a purpose.
3. After he bought such stocks and bonds he held on “until the cows came home.” He never made a practice of speculative buying and selling and never tried to catch the market swings. He simply bought when bargains were offered. He never sold unless the stock market was going bad or the price offered was too good to refuse

The story is told of a young couple who used the following plan:

1. Starting in 1915 they regularly saved 10% of earnings and little by little bought sound common stocks.
2. They never speculated or sold and knew nothing about the stock market. In 15 years an original investment of $5000 was worth $100,000 because of dividends, split-ups etc. of the original stock.

This seems to be the sound rule for obtaining wealth but it requires patience which few possess:

1. Live on less than you earn—save at least 10%.
2. Invest, don’t speculate so that none of the principal is lost. Re-invest the earnings.
3. Never sell a good stock unless the price is above its intrinsic value

In looking back it is interesting to note that expansion of business during a boom is a mistake. The time to expand is at the end of a panic when the economic cycle is headed up again.

It pays to do business only with the strongest bank in the community

Again and again I am forced to the conclusion that in prosperous times a man must be cautious and preserve his capital and be careful not to over-expand his business or to go too deeply in debt relying on a continuation of good business to pay the debt. In time of depression a man can be brave and if the depression is nearing an end he can invest his money or expand his business or open a new business with confidence that he is facing 5 or 10 years of prosperity

An interesting side light of the depression was that unemployed people became interested in small gambling games and the inventors of these games made considerable money

Even the strongest banks can’t keep this up long. They do not have enough cash to pay everybody. Much of their funds are invested in railroad bonds and other securities which were once considered gilt-edged but are now selling below par so that the banks cannot afford to liquidate. Investments like mortgages are frozen tight. There is clearly something wrong with our banking system which permits such a situation to come about. It is hard to rent a safety box today because there has been such a demand by hoarders. Actually the liquid cash of the bank is being transferred from the bank vaults to the private safety vaults where it is taken out of circulation and becomes sterilized.