During the late 1920s, optimism was running high. People everywhere were getting into the stock market hoping they could follow the example of market barons like Livermore, Meehan and Durant who were making millions. Buying on margin was prevalent and speculation rampant.
It was in this environment of greed and optimism that America suffered it’s first great market collapse. The date was October 29 and few saw it coming. Among the few was Roger Babson, a business theorist.
Babson gave a speech a month and a half before the Crash of 1929 where he stated, “Sooner or later a crash is coming, and it may be terrific.”
According to Wikipedia, Babson had “ten commandments” he followed in investing. These were:
- Keep speculation and investments separate.
- Don’t be fooled by a name.
- Be wary of new promotions.
- Give due consideration to market ability.
- Don’t buy without proper facts.
- Safeguard purchases through diversification.
- Don’t try to diversify by buying different securities of the same company.
- Small companies should be carefully scruitinized.
- Buy adequate security, not super abundance.
- Choose your dealer and buy outright (i.e., don’t buy on margin.)
In a time of uncertainty and continuing economic woes – it’s good to look back and check ourselves so as to not repeat the past.
While optimism is a great character trait – it should always be checked with reasoning and common sense.