Three lessons that must be taken from 1929 crash of stock market

The 1929 crash of the stock market is one of the most known plunges that has been experienced in major equity markets around the world. It is not the only one stock market crash, but it is the most known and is also quite often mentioned during this debt crisis that world is experiencing in years since 2007.

This situation-often called the great stock market crash of 1929-had the same roots as other crashes throughout human history. It was a huge leverage or using of debt to speculate with different assets. It could be mostly speculation with stocks or shares of some company that experienced most known bubbles.

But there was also huge speculation with tulip bulbs that happened in 1637 when this mania peaked. It is known that during this time the price of a bulb reached levels of 10 years salary of some skilled craftsman.

One reason why bubbles happen is that investors do not learn from history. The situation during the stock market crash in 1929 was well documented but debt mania happened again during the market crash of 1987. This time it was mostly banking debt as opposed to private debt issues during 1930s stock market crash.

1929 stock market crash graph

Here you can see the chart of the Dow Jones index during this crazy time when speculation was quite common. As you can see, the great crash in 1929 pushed price down a lot and the major Dow Jones index experienced a 85% decline from its peak in 1929.

1929 stock market crash graph

Major lessons for investors based on 1929 crash of stock market

There are plenty of lessons that can be learned from the 1929 crash of the stock market. Here I would like to define the three most important issues from my point of view.

Investors should have a stock investment plan that describes how to invest in stocks. This is a similar plan to any business plan of a company or some business activity that is done to make money. Investing in an equity market is also done with the aim to make money. So it must be well planned.

This plan should have defined rules for money management and risk management. Not all equity investments will be successful, some of them could finish in loss. Only proper risk management rules and money management rules for investing in shares will arrange that these losses will be small compared to profits that will be generated by profitable investments.

Do not use excessive leverage to invest in shares. Do not borrow money for your brokers account. Use only money that you can put at risk. This was one of the biggest mistakes made by investors that lead to the 1929 crash of stock market.

Books about stock market crash in 1929 and other important crashes

Here is a list of books that describe the reality of the 1929 stock market crash. I have read some of them and would recommend to read them if you want to learn more details about the situation during the stock market crash of 1929.

I have also added several other books that describe stock market crashes in general. These books are good reading if you want to understand the vicious circle of debt: lending, borrowing, crashing and (sooner or later) recovering.

book the day the bubble burst