FPC Blog

Lessons Learned from the 1929 Stock Market Crash


A lot of people have been questioning if we will experience another stock market crash in the near future. Chances are that it is quite unlikely. Today, we know much more than they did nearly a century ago when the stock market crashed. The crash itself actually taught us many lessons that has helped us steer away from crashing ever since. Noting that the stock market survived the Covid-19 crisis that many people fear would destroy the market, it’s pretty safe to say that Wall Street has a solid foundation and can now bear even the toughest of times.

Learning from our previous mistakes has played a big role in reconstructing the stock market to what it is today. There are many things that we know today that the professionals of that era did not know. If you had to take a guess, do you think you could name a few?

  1. The primary cause of a market crash stems from panic. That’s right, people in 1929 prematurely panicked and ultimately created their own fate. Today we know that there is no need to spring into panic mode. It only causes chaos. And even with the Securities Investor Protection Corporation in place, panic can still ripple through a market incredibly fast. Not to mention, once mass panic and hysteria starts, it’s very difficult to stop.
  2. Regulations are now in place that can slow down sell offs and prevent rundowns. For instance, curbing and halting selling for just a few minutes at a time can allow buyers and buy to cover orders to meet the demand of sellers, thereby preventing rundowns.
  3. New Instruments can significantly increase risks. Therefore, it’s important for new instruments to also have some sort of Trust accounts and some buffers. Take mutual fund companies for instance. They must hold capital in reserve to meet redemption demands just in case they end up in a position where there is a panicked market. They also undergo regulatory oversight to ensure there is sufficient cash held in reserves to meet redemption demands without having to force a fire sale of long term held stocks or bonds.
  4. Brokers who are over leveraged are considered high risk factors. There are also regulations put in place to manage the risk posed by over leveraging brokers. Recently, most brokers have had to cut back their margin offerings so that they can meet regulatory restrictions on the amount of margin they have out in the market. This is because margins have largely been the reason that brokers go bankrupt. If they don’t closely follow these sorts of regulations, the brokers end up in positions like Robinhood who the SEC is currently investigating.
  5. The stock market tends to balance out on its own naturally. Stocks that tend to drastically fall are the ones that no longer have any real value in our society. And even with those, you’ll see people (typically young, naive investors) swoop in and buy them up simply because of the low prices. In turn, the downward trend will eventually plateau or even begin to rise again. Not to mention, there will always be some new business that will end up as the next big blue chip stock. There will always be new technology developed that will forever change our economy, our society, and our national wealth.
  6. However, perhaps the biggest risk in the stock market is all of the uneducated idiots that blindly gamble with their investments. It’s true when they say greed turns off common sense, logic, and all reasonable decision making. Luckily, with today’s technology, information is always just at your fingertips. Young, fresh investors have to do their part and make sure they put in the time and research before investing instead of placing random bets.

So when people ask if I think the stock market will crash anytime soon, I am confident in saying no. We have a good understanding of the things that lead to the 1929 crash. More importantly, we know and have regulations in place that can help prevent a crash from happening again. Even through tough economic times, the foundation that we have laid for the stock market has proven to be strong. As long as people remember the lessons we learned, the stock market will be just fine.