From my years advising investors and businesses since the late 1920s, I’ve learned many important lessons.
Please don’t relearn them the hard way. Instead, seek to take advantage of my experiences to better your life.
Lesson #1. Politicians Cannot Truly Rescue our Economy
If the hot air from politicians could power cars and trucks, we’d never have an energy crisis in America.
Time and time again, politicians from both parties have promised to bring prosperity in the midst of difficult times.
And in each case, we had to relearn this simple, fundamental lesson: Ultimately, the government can’t do it. The only power that can rescue our economy is the hard work and sacrifice of millions of Americans.
Any attempt to mandate the level of wages or prices is a joke. Nixon tried wage-and-price controls in 1971, and the end result was the greatest explosion of prices in modern history.
Everyone knows that price ceilings create shortages that are damaging to the economy. And everyone also knows that price floors create surpluses that are equally damaging. And yet politicians of both parties continually seek to tinker with both.
What’s worse, the Federal Reserve frequently manipulates the one price that has the most sweeping impact on all goods and services — the price of money.
In a desperate attempt to create an economic recovery, the Fed pushes interest rates down far below where they should be to balance the supply and demand for money.
Sure, this can help stimulate the economy and drive up stock prices. But it also has more pervasive and perverse impacts. It punishes savers. It rewards speculation. It creates massive shortages of the savings and capital that our country needs to sustain real growth. And sooner or later, those shortages drive interest rates dramatically higher.
Prudent fiscal policy, one of the few things that could put America on the right path for the long term, is another joke.
Every opinion survey I’ve ever seen has shown that people think the government should live within its means — just like any household. In response, almost every Congress and every President promises deficit reduction. But I have yet to see them fulfill that promise.
The only way they know to get the federal budget deficit down is with smoke and mirrors. And their biggest smokescreen is artificial stimulations for the economy. That jacks up income and income tax revenues to the government for a while. And that gives politicians a chance to take credit for a reduction in the deficit. But as soon as the stimulus is taken away, the economy sinks again and the red ink comes back in a flood.
Just look back at all the promises we’ve heard about fiscal restraint.
In 1974, procedural changes were made to the budget process to help balance the budget.
So did the Omnibus Reconciliation Acts of 1990 (under Bush) and of 1993 (under Clinton).
But emergency spending bills followed on the heels of every hard cutback. Impoundment procedures were tried — and failed. Spending was capped — and promptly uncapped.
And despite all the efforts, they left one of the major causes of the deficit — automatic, out-of-control spending on entitlements — mostly untouched. It doesn’t matter if you’re a Republican or a Democrat or an independent. This is bad news for anyone who wants to see our country embark on a true, lasting recovery.
Lesson #2. Beware of False Recoveries
If you see another deep, multi-year bear market in your lifetime, don’t assume it’s over just because people say it is.
Typically, a secular decline in the stock market and major woes of the economy do not happen all at once. They take place in phases, and at the end of each phase you will inevitably hear voices — sometimes loud, sometimes not — that “the worst is over.”
That’s what we experienced after the crash of 1929.
The market rallied sharply into April of 1930, and only a small minority — including Bernard Baruch and me — recognized that the first phase of the market’s decline was just the beginning of a long and arduous period in our history.
Nearly everyone in Washington and on Wall Street was convinced a new bull market was on its way or that prosperity was just around the corner. They were wrong.
Most learned their lesson the hard way. And strangely, some still didn’t get it.
Indeed, just a few years later, in the middle of the 1930s, it happened again. In response to massive government attempts to revive the economy, the Dow Jones Industrials rallied sharply. Again, the pundits prematurely declared the end of the crisis. Again, investors were trapped, as the Dow plunged into its second major bear market of the century.
It took us many years to figure it all out. But by the end of the decade it was blatantly obvious: Once the backbone of the stock market and economy was broken in the crash, it took decades to repair.
We eventually learned that the short-cuts governments typically seek, like pumping in money, seem to work at first. But then they backfire.
Lesson #3. Inflation Is Never “Totally Dead”
Years ago, everyone thought double-digit inflation would continue forever.
Martin and I said these forecasts were off base; and we told subscribers, over and over again, to expect deflation.
The warning signals were everywhere — interest rates far in excess of inflation, huge supply gluts around the world, and a speculative bubble in commodities which was ready to burst wide open.
But very few believed us; some said we were “nuts.” Their entire financial life — including their homes, art and other collectibles, bullion and coins, gold shares and even traditional investment portfolios — was 100% predicated on the idea that inflation would last forever.
Boy, did they get the shock of their lives when prices came crashing down! In the years that followed, most commodities and other hard assets lost half of their value — sometimes more. Everyone who bet on inflation got clobbered.
But just when everyone is saying inflation is dead — that’s when you need to start worrying about inflation again. Inflation never dies. It merely goes into a deep sleep. When it reawakens, you’d better watch your step.
At that juncture, some of the biggest speculative bubbles to watch out for are not in commodities; they’re in stocks and bonds. Values are grossly inflated. The amounts investors pour in are simply far beyond what they can afford to risk.
Lesson #4. Don’t Forget the Rest of the World
In the early 1950s, I took my family to Central and South America to live for a few years. Our three children, Linda, Joe, and Martin, went to local schools and learned Spanish and Portuguese. I even explored the central highlands of Brazil, near where Brasilia would be built years later.
It was a great experience, and I’ve been watching events around the world ever since.
I was convinced that the three giants of Latin America — Mexico, Brazil, and Argentina — would become economic powerhouses.
But never, in my wildest dreams, did I expect to see the distortions so strikingly obvious in their economies: Big debts. Over-reliance on foreign capital. Horrendous discrepancies in the distribution of wealth. It made me cringe to see what was done to these potentially great countries and their citizens.
What makes me cringe even more, however, is to see how our own country has sometimes followed a similar path. We are overburdened with debts, both domestic and foreign. We have become overly dependent on a continuing flow of savings from outside our borders.
Back in 1941, I helped write and publish a book “Japan and America Must Work Together.” The timing couldn’t have been worse, and due to an uproar over the book after Pearl Harbor, we had to withdraw it from circulation. But our premise was very sound: The two economic giants were natural trading partners back then and they’re even more so today.
There was another kind of partnership, however, that we never anticipated: American families have emerged as the leading spenders of the world; while their counterparts in Asia are among the world’s leading savers. As a result, they rely on America’s consumers to buy their products, while we rely on them as a big source of capital to finance our deficits.
This is not a healthy situation for two reasons: If American spenders reduce their spending … or their savings are directed elsewhere, both could find themselves in deep trouble.
Lesson #5. Extreme Government Maneuvers Can Backfire
In a time of economic crisis, Americans will again look to their government as a savior. That’s also not healthy. When the government steps in with emergency economic rescues or maneuvers, it often leads to unforeseen and uncontrollable circumstances.
The best illustration that comes to mind took place many years ago, in February 1933.
A major insurance company failure almost sank the Hibernia Bank & Trust Company, then the third largest in New Orleans.
Hibernia’s president got $ 4 million in government loans for the busted insurance company to reduce its debt to the bank.
But when word of the loan leaked out, depositors figured the bank was probably in trouble, too. So they immediately lined up to withdraw their funds. By the close of business on Friday, February 3, it was clear that the bank could not survive another day of withdrawals.
That night, Louisiana’s legendary senator, Huey Long, summoned the governor and leading bankers to hammer out an emergency $ 20 million loan to Hibernia from the state and from the Fed. They agreed. But due to slow transportation, there was no way to physically move that much money to New Orleans before Monday morning. Meanwhile, the bank didn’t have enough cash left to survive its customary Saturday banking hours.
Fearing that any admission of a crisis would only make it worse, Long pleaded with the governor to proclaim Saturday some kind of public holiday — to give the banks an excuse to stay closed.
The governor rousted a local librarian out of bed to find something — anything — to commemorate. But nothing of historical significance had ever happened on February 4th. The best the librarian could come up with was that the United States had severed diplomatic relations with pre-World War I Germany on February 3, 1917.
So even though it was a day late, the governor declared February 4th a holiday. The banks stayed closed without comment. And puzzled Louisianans duly celebrated the 16th anniversary of the diplomatic break with Germany. On Sunday, the bank announced the $ 20 million loan — plus an additional $ 4 million from other local banks, and by Monday morning, the crisis seemed to have passed.
But a month later, Franklin Roosevelt was inaugurated, and he immediately declared a banking holiday nationwide.
The bank holiday had all kinds of unexpected ramifications:
In Reno, Nevada — already a national center for quickie divorces — unhappy couples were made even more unhappy when the court turned away anyone unable to pay cash for filing fees.
A streetcar in Salt Lake City accepted a pair of men’s trousers in lieu of a cash fare. A Lewiston, Montana newspaper sold subscriptions for 10 bushels of wheat.
In Oklahoma City, a hotel offered to allow guests to settle their bills with “anything we can use in the coffee shop.” The first customer presented a pig.
But it was the governor of California who came up with the most novel scheme to conserve cash: He halted payments to the executioners normally hired as independent contractors by the state prison system. When asked about the sudden suspension of previously scheduled executions, he simply declared: “A bank holiday is no time to hang a man.”
The moral of this story: When the government takes unusual measures, expect unusual results.
Lesson #6. Bad Times Are Not ALL Bad
Most people think of me as a “gloom and doomer.” I’m not. In fact, the true pessimists are those who think our country will continue to muddle along with huge, burdensome debts and federal deficits, stumbling from one crisis to the next without ever resolving the problem.
I think there’s a light at the end of the tunnel — and it’s not an onrushing locomotive. Despite its depth and duration, the next phase of the crisis will not destroy America at its core.
Despite the pain, I can tell you from personal experience that economic crises also have some long-term benefits.
During the Great Depression, for example, most bad debts were wiped out — liquidated and written off.
Old technologies were cast aside in bankruptcies, paving the way for new technology to be put into place.
Americans became more willing to accept an austere standard of living and to work harder. So they were able to trump other countries and dominate world trade.
I don’t know if this country will do as well after the next crisis. But even if the recovery is half as strong as it was last time, it will provide some excellent opportunities.
Lesson #7. Be Patient With Friends and Family
In the first phase of the market’s decline, most of your friends and family will stubbornly refuse to take action. Some will say they can’t afford to take a loss. Others will say they can’t afford to take a profit (because of capital gains taxes).
If you’re concerned for their financial well-being, negotiate a compromise: “Get half of your money into safer investments now. Work on the second half later.”
Later, when the economy and markets decline, you will have the opposite problem: Many — whether owning stocks or not — will sink into depression. You can help again by simply reminding them: “This has happened before, and it was not the end of the world. We survived it, and so can you.”
Still later down the road, if the nation sinks into another recession or depression, you will hear many voices bemoaning the “downfall of America,” the “death of capitalism,” even the “end of civilization.”
Don’t be fooled! No matter how much material wealth is lost, I’m confident that America’s wealth of knowledge and know-how will remain intact, paving the way for a real recovery — provided we learn some of the tough lessons of history.
I wish Dad were here today to tell us what he thinks about events that have come to pass since then — the tech wreck of 2000, the housing bust of 2006, the debt crisis of 2008 and the massive Fed money printing ever since.
The fact remains that no one can predict the future with precision. The best we can do is prepare prudently, and that’s what you should do too.
Never forget the key factor that has always sustained prudent investors through thick and thin — SAFETY. Always favor lower risk investments, taking bigger risks strictly with money you can afford to lose.
Good luck and God bless!