top of page

Profiting from the Great Depression: 5 Time-Tested Investment Lessons

Post great depression stock chart

The Great Depression was a devastating economic event that lasted from 1929 to 1939. However, despite the hardships during this period, it left some valuable investment lessons that remain relevant in today's financial markets.

By understanding the causes and strategies that helped investors survive and thrive during the Great Depression, you can apply these time-tested principles to your investing journey. This article will explore five crucial lessons from the Great Depression era.

The Importance of Understanding Macroeconomics

The Great Depression was caused by one thing... The Roaring 20's! So, with that being said, how did this decade cause the worse economic decade of all time?

It was led by many macro factors, I will explain how they all unfolded.

1st, let's dive into how the Roaring 20s started. It was caused by post-WW1 policies, which mainly included easy lending practices, and also near 0 interest rates.

This can lead to too much liquidity in the markets.

How does this happen, and how could this be a bad problem?

Well, everyone and their moms were investing in the stock market, and making the 20% returns the roaring 20s averaged.

But, since everyone was making money, it didn't matter what stock they invested in. So, this over-inflated most stocks, as well as the total economy.

So, in 1928-1929 the Federal Reserve came out with a plan to hedge against inflation and to try and deflate some of these assets.

Well, if you were paying attention to the macro factors like the Fed at this time, you could anticipate a market crash.

This anticipation for rising rates would help you see that businesses will slow in growth. This is because it takes more to borrow money via interest rates, so businesses borrow as much.

If or when you saw these macro factors going down, you should've thought to short the market.

This is an example of Jesse Livermore's story, who shorted The Great Depression after the rise of interest rates.

He made over $100 million at the time.

So, in conclusion, remember that the macro factors of the economy will always impact us more than any micro factors.

Always look at the big picture, and make strategic bets based on your conviction.

Avoiding Purchasing Stocks on Margin

The Federal Reserves policies helped start The Great Depression, but what helped the domino aspect keep falling?

The simple answer is the effect of margin buyers.

Investors took advantage of these near-0 rates, by buying stocks on margin with these near-interest-free loans.

Throughout the Roaring 20's, investors' average returns were 20%. But, what happens when the Federal Reserve pivots, and the stock market starts to sell off?

Well, all investors during the Roaring 20s can say ... it's not good.

Most investors were caught in this financial storm. Since investors were using the bank's money, the investors AND banks were about to be in trouble.


If investors sell for a loss, they wouldn't have enough money to pay the losses for their loan principle.

This + rising rates would cause investors to also have to pay interest on their principal that they already can't pay off.

Most investors invested in over-inflated stocks at the time. So, when the stock market crashed in 1929 from rising rates and different economic factors, most investors were caught investing in bad companies not producing enough cash flow for the impending crash coming.

So, this caused a domino effect of problems.

One side was the retail investors who were losing money on their loans, putting them in debt.

The other party who was affected was the banks.

Banks were invested in these same over-inflated stocks as well. But, this combined with losing the money they loaned out to depositors really hurt our economy.

This is really why The Great Depression lasted as long as it did.

So, what lessons can we learn from this?

  1. Invest money you can afford to lose. When emotionally attached to your investment money, you react more emotionally to fluctuations in the market. This usually leads to investors selling their assets at the worse possible time, usually for the worse loss they can take.

  2. Second, NEVER BUY STOCKS ON MARGIN! Anything can happen in the markets, so never bet too much money in a single asset class. Just like investors saw in the Roaring 20s, INVESTMENT ENVIRONMENTS CHANGE!! Don't ever put yourself in debt, especially to buy stocks, because you might lose money on the investment AND you'd end up in debt. Remember that nothing in the stock market is guaranteed, and you'll always have the risk of losing money in the market.

Emphasizing Due Diligence and Keeping Your Investment Conviction

During The Great Depression, investors like Ben Graham made money investing in the stock market, instead of shorting it.

How could this even be possible?


Ben would look for great companies that were undervalued due to market conditions. So, how can we follow his legacy, and find undervalued companies?

There are many ways you can learn how. So, TEACH YOURSELF NOW! It's never too late to learn how to look at a company's financials to see if the company is healthy or not.

If you want to be financially free, you have to work for it like Ben did. He didnt get lucky in the stock market, like most people think traders do. Instead, he found companies HE KNEW AND WAS FAMILIAR WITH, and valued it himself.

Valuing it isn't the only thing you have to do. You also have to time your investment. This is because you have to wait until the stock gets to the price you valued it at.

So, you have to be very patient during these times. Then, like a sniper, I wait patiently until the perfect shot. Then when I see the shot, I don't hesitate. When you see an oppurtunity in the market, act opportunity because it quickly be their forever.

As the renowned economist John Maynard Keynes noted, "The market can stay irrational longer than you can stay solvent."

Resist FOMO and Herd Mentality

When you hear of herd mentality, what do you think of? I think of the sheep and shepherd analogy. Sheep will follow the shepard no matter what intent the shepherd has in mind. Most investors during The Great Depression were like sheep, following others ideas.

In the market, you cant trust anyone but yourself.

I've learned this the hard way, just like many others including Jesse Livermore.

Jesse Livermore is one of the greatest traders of all time. But, he went bankrupt twice before his success.


The second time was because of herd mentality, a lesson he never forgot.

Livermore had a close friend named Pat Hearne, a fellow trader who was known for his bearish outlook.

Hearne convinced Jesse to short wheat back in 1924-25. Hearne didn't tell Jesse when to cover his shorts, and ended up not being able to pay his margin call.

This caused Jesse to become bankrupt for the second time in his life.

This is like many investors during The Great Depression.

Most investors followed the crowd by buying stocks on margin.

When following the crowd, you usually don't end up knowing the risks that come with the investment, usually you'll only recognize what the reward could be.

Also, when following someone else's plan, you'll never know when your wrong. This causes investors to stay in devaluing assets because they don't know when to sell out because they don't have the conviction to know when their wrong.

This was a prime example in the story of Jesse Livermore, his friend never told him when to liquidate his position, which led to him holding the bag for too long and not being able to meet margin call requirements

This lesson isn't just from The Great Depression, but it's in all aspects of life and investing. This is a principle you need to have as an investor.

1st. it'sDON'T FOLLOW THE CROWD. If you want to invest, do your homework just like you would do if you were buying a home. You wouldn't buy an overvalued home just cause your friend told you to....right?

2nd. ALWAYS KNOW WHEN YOU ARE WRONG! Even if you dont listen to rule 1... YOU BETTER LISTEN TO THIS ONE. The stock market is all about probabilities. So, there's always going to be a probability that your investment shits the bed. So, would you rather be prepared for this.....or get caught holding the bag?

Buffett said, "Our favorite holding period is forever." So, only buy companies that you can apply this to. To find them, DO YOUR DUE DILIGENCE!

Embracing Economic Cycles and Opportunities

The market reacts in cycles. This will never end. From undervalued, to valued correctly, to overvalued, THE CYCLE WILL NEVER STOP!

So, how can we profit from this? SIMPLE, TIME IT!

Always look for investment opportunities, no matter which way you invest.

If the market has near 0 interest rates, combined with a GDP-to-market ratio of overvalued of over 50%, maybe think about shorting the S&P or buying call options on the Vix.

If the market is undervalued, THIS IS EVEN BETTER. Then, you can buy great companies that are undervalued.

When the markets give you this opportunity, don't take it lightly. The markets don't give opportunities like these a lot, so you'll have to take advantage of ALL opportunities in the markets.

Lesson 1. Use economic downturns as opportunities to invest in high-quality companies at discounted prices. As the American industrialist J. Paul Getty once advised, "Buy when everyone else is selling and hold until everyone else is buying."

Lesson 2. Look for what part of the cycle we're in. There will always be opportunities in the financial markets, JUST DO YOUR HOMEWORK AND FIND THEM. Even if they aren't the traditional way of going about things, DONT HAVE A HERD MENTALITY.


The Great Depression was one of the worse economic periods in history. But, if you looked for opportunities in the market, you could've turned this shitty economic period into a great fortune as Jesse Livermore did.

By looking at all macro and micro economic factors, like interest rates, margin debt in the stock market, herd mentality from investors, and failing companies/banks, you could've made the conviction that the market was going the go through a period of failure.

When recognizing the opportunity, you have to act quickly before the opportunity leaves.

Just remember, that all bad times don't have to be so bad after all!

Related Links:

23 views0 comments


bottom of page