An alternative to the ‘casino’ of stocks and commodities

With an 87 per cent plunge in US stock market prices during the Great Depression, people across the nation were forced to queue for food and other essentials. It is a period of stock market history still studied by scholars of interest rates and equity returns. It is striking to me that in photos of the Great Depression, the clothes worn are in good repair, or even look new. Many people retained their homes but were unable to sell or borrow against the equity because the credit market had collapsed. No one could raise cash. As in the German Weimar Republic in Germany (1919 to 1933), the absence of cash and credit meant people very quickly turned to a system of barter.

Since the early 1900s, the advance of the technological age has affected the way we conduct business, how we consume products, the way we eat, and even how we dress. Today, those of us who recall life without a smart phone can best assess the price we are paying for this advancement. Social media, blockchain technology and AI distribute information at the speed of light, giving everyone access to the same information at the same time, making it possible to buy and sell 24/7 around the world. However, this technology has fostered a gambling instinct. Buying something for much less than it is worth and waiting patiently for it to be worth much more many years later, whilst receiving a passive income in the form of dividends, is an increasingly foreign concept to many. Ironically, the Great Depression provides a good example of this concept.

In 1929, a banker named Mark ‘Pat’ Munroe lived in the small town of Quincy, where Coca Cola put their first factory. Believing that in spite of terrible shortages, people were prepared to spend money on a refreshing drink, Munro began to purchase Coca Cola shares and promote the same investment to those in his community who still had cash. Albert Einstein referred to the compounding of interest, or in this case of dividend income, as the eighth wonder of the world. “He who understands it, earns it … he who doesn’t … pays it.” As any long-term investor knows, share prices do not go up in a straight line. However, the stock market goes up much more than it declines.

Coca Cola had entered the stock exchange in 1919 at USD 40 a share. From 1920 to 1932, the Dow Jones Industrial Average sharply declined by 89 per cent but in 1931, when unemployment reached 20 per cent, sales of Coca Cola decreased by only 2.3 per cent. By astute management, the company kept a strong balance sheet, retaining USD 6.5 million in cash. With zero debt, the company was able to keep paying a dividend to shareholders. By the late 1940s, a decade after the end of the Depression, the small town of Quincy was home to sixty-seven millionaires. If one share of Coca Cola stock bought at USD 40 were held until today with dividends reinvested, it would be worth 10 million dollars. Participating in a successful business, holding stock as a long-term shareholder, and reaping the rewards of a compound interest table should be considered by investors as a practical alternative to the ‘casino’.