Episode 24: The Stock Market Crash Part 1

MAK: Can you believe it?

GRANT: What’s that?

MAK: We finished Season #4, and now we’re into Season #5. How awesome?

GRANT: It really is! But you know I’ve been thinking about last season with all those stocks and bonds.

MAK: What’s on your mind?

GRANT: Dad said something that was a little spooky.

MAK: Are you talking about Ben Kenobi?

GRANT: What? Why would that be spooky?

MAK: Well, it’s Star Wars, and Ben Kenobi could do things with his mind. He had a light saber and he fought Darth Vader. That’s scary stuff.

GRANT: Ok, maybe you have a point, but I’m talking about that Stock Market crash “thingy”. We learned about stocks last season, and a crash sounds CRAZY scary.

MAK: Yeah, you’re absolutely right. Saving, investing and then a CRASH!!! Is there anything left? Probably NADA!! That would be really scary.

GRANT: I think dad studied the Crash at one time. What do you think? Should we?

MAK: I think so (in agreement).

MAK/GRANT: DAD!!!

DAD: Yippee!!! Eat that you dirty scoundrel!!!

MAK: Dad, what are you doing up there?

GRANT: He sounds a little coo coo.

DAD: I’m playing a video game, it’s AWESOME!! I’m a cowboy. Yippee Kai Yay. I get to ride a horse and I get to shoot things. Super fun. What kind of partner do you want?

MAK: Well, I’m really glad you’re having fun riding your imaginary horse. I know you always wanted to be a cowboy. But, we have a question.

GRANT: Yeah, can you take off your spurs? We want to know more about that Crash thingy.

DAD: Huh?

MAK: Dad, he’s talking about the Stock Market Crash. I think you said you knew some stuff about it.

GRANT: Yeah, THAT thing, dad.

DAD: I could do that. How much do you guys know about the stock market crash?

MAK: Nothin’.

GRANT: Nada.

MAK: Zippo.

GRANT: Zero.

MAK: Zilch.

DAD: Ok, we’ll start at the beginning, it’s REALLY interesting. Have either of you heard of World War I?

MAK: Seriously dad, why are we talking about a war that doesn’t have anything to do with investments?

GRANT: Wasn’t that the war that started when Archduke… Franz… Ferdinand was killed?

DAD: Wow, impressive. I guess you ARE learning something in that school of yours.

MAK: So, are you saying that a war can affect the stock market?

DAD: Absolutely, it often does, and it affects the stock market in many more ways than you think. But, World War I was the beginning of the story and not the direct cause.

GRANT: So, does that mean that the war wasn’t the only reason for the stock market crash, but it had something to do with it?

DAD: Exactly. It was terrible, no doubt. And, do you know where most of the fighting happened?

MAK: Wasn’t it in Europe?

DAD: It was. And, how did it affect everyone in the US?

GRANT: Didn’t great grandpa “O” say things were tougher here? He said there was less food and you couldn’t get everything you wanted because they needed it for the soldiers to eat, make airplanes?

DAD: Excellent G. And, your great grandfather couldn’t get sugar during the war to run his bottling plant.

MAK: I thought great grandpa “O” made orange soda, root beer and other sodas.

DAD: He did, but after they made it, they would put it in a glass bottle and put a cap on it. That’s why it was called a bottling plant.

GRANT: That’s cool, I guess they had a lot of sodas around the house.

DAD: They did, for sure. Can you say “Sugar Rush”? 

MAK/GRANT: SUGAR RUSH!!

DAD: Anyway, what do you think happened after the war, when you could get all those things you couldn’t during the war? In addition, you were REALLY happy the war was over.

MAK: Would there have been a party?

GRANT: Lots of parties!!

DAD: You’re both right. There were HUGE parties, parades, and all kinds of fun stuff. The war was over in November of 1918. But, the official agreement didn’t happen until June of 1919.

MAK: So, they had an “official” agreement? That sounds like a contract.

GRANT: Yeah, did the fighting countries have to sign it?

DAD: They did. It was the official surrender. It was called the Treaty of Versailles which was the name of the city close to Paris where it all took place.

MAK: That sounds strange, maybe Grant and I should sign a treaty of Indianapolis, so we don’t fight any more.

GRANT: Good one Mak, I’m down with that.

DAD: I’d be good with that too. That would make me super happy. Back to the Treaty. Once it was signed, Americans were very happy, and wanted to celebrate.

GRANT: I’d want to have fun too!!

MAK: So, what happened when everyone could find all the things they couldn’t get during the war like food, clothes, machines and other stuff?

DAD: Well, that’s the interesting thing. EVERYONE was spending money, they were focusing on new technology like cars, motion pictures and all kinds of stuff.

GRANT: Seriously, that was NEW technology? A car? Movies? Telephones?

DAD: Yep, that was really new stuff way back then.

GRANT: Wouldn’t that mean there was some serious growth going on. There were lots of happy people coming home and all those new things to spend money on.

MAK: Dad, does that mean companies were doing better and the expectations would change a stock’s price?

DAD: Excellent point Mak. It did. When people saw how things were changing and all those people were spending a lot of money, the expectation was that companies would make more money and grow.

GRANT: Sounds like it was a REALLY big time for growth?

DAD: It was. And, it was so big that the French had a name for it. They called it “Les Annees Folles” or the crazy years. But we refer to it as the ROARING 20’s.

MAK: Ok, let me get this straight. The war ended in 1918. Then, it took until 1919 to sign the agreement to stop fighting, and then in the 1920’s, things went crazy.

DAD: That was perfect.

GRANT: So, what happened to the stock prices during this period?

DAD: Well, if you looked at all the stocks together, they multiplied by about 10 times in just 9 years. So, if something was selling for 2 dollars early on, Grant, how much was it worth after the increase?

GRANT: $20.

DAD: yep. And, Mak, if the price of a stock was $50 at the beginning of this period, it was then worth how much at the end????

MAK: $500 dad. Wow!!

GRANT: That’s a huge change dad? So, what happened next?

DAD: Do you remember where you can find information on the sales, expenses and how much money the company makes? It’s one of the Financial Statements.

GRANT: Did you say “Substantial Statements?

MAK: Grant, they’re called the “Financial Statements”. You know “finance”, “money”, that sort of thing. And the one with sales and expenses is called the “Income Statement”.

DAD: That’s right. Brilliant Mak. You had to make those when doing your pet walking business. And, do you think that’s important for anyone who wants to invest in the company?

GRANT: Absolutely. A company that does better than expected usually sees a jump in their stock price. But, they have to make money. So, the income statement highlights what happened, right?

DAD: Exactly. But during this time, they didn’t have anyone looking to make sure the financial statements were correct. They call these people “Auditors”.

MAK: Wasn’t that your job for 10 years dad??

GRANT: Yeah, isn’t that what you did at Eli Lilly? They’re the ones that make medicine, right??

DAD: You’re both right. An auditor checks to make sure the financial statements are pretty much correct.

GRANT: Why wouldn’t they be “correct”?

MAK: Could there be mistakes?

DAD: There are almost always mistakes. Think about it. Companies sell millions and millions of items, so they have to track each one of those sales, and that’s a lot to get right.

MAK: Wow, that blows my mind. That would be A LOT of accounting to get right.

DAD: I agree, accounting tracks all the “ins” and “outs” of the money. And, what would happen if the expectation for a company was to earn $75 of income, but the income statement said $300?

GRANT: That’s easy. The stock would’ve jumped like a Mexican jumping bean because they did MUCH better than expected.

MAK: Yeah, that sounds like an awesome stock. I’d love to own that company before it went up.

DAD: But, wait. What if the company decided they would change numbers on the financial statements to look better, but they were lying?

GRANT: Can they do that? That’s just not right.

MAK: They shouldn’t be allowed to do that. They should go to jail for lying?

DAD: I agree, but it can be done. In the late 1920’s there weren’t auditors to make sure everyone was being honest.

MAK: So, companies made their financial statements look better?

DAD: Not all companies, but many did. Hey, mom just sent me a text, she bought me that hover board I wanted. Yes! 

GRANT: Dad, you’ll kill yourself.

DAD: It’s soooo cool. It has speakers on it that link to my phone. YIPPEE!!!

MAK: Dad, seriously? How old are you?

DAD: I’m old enough to know better and, neither of you can use it!!! Oh, oh (excited). The lights blink to the rhythm of the music, it’s soooo cool. I’m going to walk to Oreo with it, take out the trash with it, and get the mail. AWESOME!!

GRANT: Are you serious?

DAD: Absolutely. All your friends will think I’m the coolest.

MAK: Dad you’re nuts.

DAD: Well, I got to run for now. Time for me to do some RAD tricks on my new board! Let’s pick up where we left off later.

MAK/GRANT: Bye dad!!

Ben’s two Cents

Investing has risk, just like a 50 year old man trying to do tricks on a hoverboard. Think about that for a minute.

If you were invested in the stock market when it crashed, you would have lost 80% of your money. It’s like wiping out on a hoverboard. The stock market crash is considered the worst decline in US history with a 25% drop in just four days. And, at this point, we have just started to understand that stocks are affected by a lot more than actual performance and expectations. These are exceptions, but it can be a bit scary and feel like it’s out of your control. 

The War created a great deal of demand and a high level of exuberance when it was over. People felt REALLY REALLY happy. That led to a great deal of spending, innovation and easy money. When these items all occur at the same time, sooner or later the party comes to a screeching halt and it’s not pretty. As an investor, having some knowledge about how money moves around in the economy helps you to understand how it affects the price of assets, like stocks. So, understanding risk is a fundamental concept of investing. Stocks are definitely risky, but as discussed, generally more risk means more reward. We’ll look at how we balance this moving forward.

We’ll continue to talk about risk in different circumstances related to investing. So, this is not only a great story, but a fantastic learning opportunity. Stay with us as we finish it off in part 2 of our next podcast. And, as always, thanks for being here. We love having you with us at Money with Mak & G.