2020: The Great Depression's long-term effect on stock prices.
WARREN BUFFETT: So, the Great Depression went on. And it lasted a very long time, but it lasted a lot longer in the minds of people than it did actually in its effects.
World War II came along. And on sort of an involuntary manner, we adopted Keynesianism, we started running fiscal deficits, of course, that were absolutely huge and took our debt up to a percentage of GDP which we’d never reached â had never reached before â and have never reached since.
So, we had an enormous economic recovery. But the minds of people had been so scarred â the memories. Parents told their children. Nineteen-twenty-nine became a symbol in people’s minds. I mean, if you said 1929, it was like saying 1776 or 1492. I mean, everybody knew exactly what you were talking about.
And it affected stock prices in a rather remarkable way to the point â if you’ll change to the next slide â it was January 4th of 1951 â that the kid who was born on August 30th in 1930 had finished college â before the stock market got back to where it was at that earlier time.
So, take the years from 1920 â 1930 â or 1929 (inaudible) â to 1951 â or take the year from my birth â 20 years â and bear in mind that, you know, the country was only 140 years old when this started at.
That’s 20 years out of this amazing 231-year lifetime of our country that was flat out, you know, a time of â for a long time â of no economic growth and no feeling by people, in terms about the wealth of the country, about what American economy was worth, but all these corporations that were doing far, far, far better than they were (inaudible).
But it took all of that time to restore in the market a price level that was equal to what it was when I was born 20 years earlier.
So, if you think about the fact that we’re enduring a few months, and we’ll endure some many more months, but â and we don’t know how it comes out â and people in the ’30s didn’t know how it was going to come out â but they endured, persevered, prospered, and the American miracle continued.
But it’s interesting in that â I actually don’t have a slide for the next one because last night, I was thinking after all the slides have been prepared, I was actually thinking about this a little late, a little bit, and I remembered that in 19 â at the start of 1954, the stock market was â the Dow was only at about 280. And I remember 1954 because it was the best year I’ve ever had in the stock market.
And the Dow went from, essentially, what â 2 â 280 or thereabouts at the start of the year to a little over 400 at the end of the year.
And when it went to 400, as soon as it went across 381, that famous figure from 1929, when it went to 400 â and this will be hard for some of you to believe â but everybody wondered, is this 1929 all over again?
And that seems a little farfetched, because it was a different country in 1954. But that was the common question. And it actually achieved â it was, you know â it achieved such a level of worry about whether we were about to jump off another cliff, just because the 381 of 1929 have been succeeded â exceeded â that they held â Senator Fulbright â Bill Fulbright of Arkansas, who became very famous later, in terms of the Foreign Relations Committee â but he headed the Senate Banking Committee, and he called a special â for a special investigation and he called it the â what did he call it? â the stock market study, but it really is â if you read through it â he really was questioning whether we had built another house of cards again.
And on this committee â it’s interesting to see the Senate Finance Committee â one of the members was Prescott Bush, the father of George H.W. Bush, the grandfather of George W. Bush â and had some illustrious names.
And his committee, in March of 1955, with the Dow at 405, assembled 20 of the best minds in the United States, to testify as to whether we were going crazy again, because the market was at 400 â the Dow was at 400, and we’d gotten in this incredible trouble before. But that was the mindset of the country. (Inaudible) incredible.
We didn’t really believe America was what it was. And my boss â the reason I’m familiar with this thousand-page book that I have here â I found it last night in the library â I’d never â was that I was working in New York for one of the 20 people that was called down to testify before Senator Fulbright.
And he testified right before Bill Martin, who was running the Federal Reserve, testified and right after General (Robert) Wood, who was running Sears, testified. Sears was very, very important then.
And Bill Martin, of course, is the fellow that â the longest running chairman in the history of the Fed, and he’s the one that gave the famous quote about the function of the Fed was to take away the punchbowl just when the party started to get really warmed up.
But Ben Graham, my boss, sent me over to the public library in New York and â to gather some information for him â something you could do in five minutes with the computer now â and I dug out something, and he went to testify â and on page 545 of this book â I knew where to look, I didn’t have to go through it all â but he had the quote, which I remember.
And I remember because Ben Graham was the â one of the three â smartest people I’ve met in my life, and he was the dean of people in the securities business. He wrote the classic “Security Analysis” book in 1934. He wrote the book that changed my life, “The Intelligent Investor,” in 1949. He was unbelievably smart.
And when he testified, with the Dow at 404, he had one line in there right toward the start in his written testimony, and he said the stock market is high â looks high â it is high, but it’s not as high as it looks. But he said it is high.