Eingestellt am 24. Februar 2014 · Eingestellt in Alle Publikationen

A chart that details parallels between the stock crash in 1929 and the current course development of the Dow Jones permits only one conclusion: The collapse is imminent.  However, this thesis does not hold up under closer review.

Investments in stocks are always combined with risk. The definition of risk for each individual Investor depends on his personality. In the scientific discipline of the decision making theory, risk means that from today’s standpoint it is unclear what development will take place in the future, and that the individual future states cannot be assigned a so-called probability of occurrence.   Whichever definition of risk one wants to use, it is clear that man has made it his mission to eliminate the uncertainty in respect to the future with the help of different methods. The instruments used for this range from purely mathematical methods taking into account the history of psychological analysis in respect to the behavior of market players to the analysis of charts. In this area of chart analysis some of the wildest and, for any outsider incomprehensible, chart patterns exist, which in turn can be used to predict future developments. Naturally, there are also some meaningful insights that can be pulled from chart analyses.

One type of this analysis is, especially in the USA, currently cause for many discussions and plenty of public attention:

“Chart of the Day: Current stock market brings back memories of 1929!”

“Five signs that a crash like 1929 is imminent”

These are only two headlines from the seemingly endless flood of cover stories, columns, and editorials coming from the media.  Therefore, first of all, a short summary of what the discussion is all about.

Origin of all the speculations and discussions is the following graphic which first appeared in September of last year in one of the countless stock-exchange Blogs.

Grafic 1

Fig. 1

Here you see a comparison between the current course of the Dow Jones 30 Industrial (from mid-2012 to September 2013, green line) and the historical course of the Dow Jones 30 Industrial (from January 1928 until after the big stock market crash in October of 1929, grey line). With the help of a clever choice in the scaling of the graph, a strong parallel between the course developments can be created. For the media this type of representation clearly means a successful story for the cover page. This resulted in the previously mentioned headlines, among other things.

First, a brief reminder: After the stock prices nearly doubled between 1928 and summer 1929, there was a dramatic price decline in October of 1929. This is considered the trigger of the ensuing global economic crisis.  Leaving the clever design of the graphic aside, the question arises whether we are in a similar situation today. While the “Roaring Twenties” represented a long-lasting economic rise in which the share prices had risen strongly for almost 10 years, the USA as well as the rest of the world are currently still recovering from the crisis in 2008 and 2009. Additionally, at that time stock purchases were often financed by loans, because the investors were convinced that prices could go nowhere but up. When the shares began falling in October of 1929, banks began demanding the loans back and accelerated the selling frenzy. So, on a fundamental level the two starting scenarios are not really comparable.  Taking a look at the identical graph, but from the current standpoint confirms the assumption: the catastrophic crash has failed to happen!

Grafic 2

Fig. 2

Of course, such a development should not be rewritten to the other  extreme following the motto “the crash has failed, stocks continue to flourish”, but it becomes clear that monitoring a certain period of time and watching for parallels is not a valid scientific method.  A better method would have been a relative comparison of the two time periods, both normalized to a base and then representing the percentage changes.

Grafic 3

Fig. 3

If this more polished representation had been published, the current discussions would never have occurred. At the same time, however, there might have been a few less headlines and newspaper sales.

What should Investors learn from this?

“You should not believe everything you read in a newspaper or watch on TV”, is a good principle which is certainly true not only in terms of the stock market and the economy.  However, for laymen as well as experts it is often difficult to review all statements for accuracy. One should be aware that every newspaper and every TV channel needs to sell papers or get good ratings in order to survive, and that daunting headlines like the ones above meet these requirements.  That’s why even serious talk shows with guests in fancy suits are made for entertainment, no more, no less.

A far more important question is what this means for each individual investor and his decisions. Headlines such as these affect so-called risk perception.  As opposed to the willingness to take risks, which is normally a very constant feature in a person, risk perception is altered through media, fellow human beings, etc.  The headline that markets are on the verge of collapsing like in 1929 causes a higher risk perception in investors (“the market is about to crash, so shares are riskier”).   For many investors, professionals, fund and trust managers alike this leads to hasty sales of the corresponding positions that may have to be purchased again at higher prices later. Scientific research shows that, with this behavior, shareholders earn 50% less yield than the compared market.

This process of poor investment behavior can only be minimized by establishing firm rules that are adhered to during investments.  An understanding of the functioning of the target market as well as a comprehensible investment approach help to classify negative headlines or announcements without causing impulse sales. The often praised and at first glance simple solution to “simply buy the whole market with the help of an ETF” is not necessarily meant by this. Certainly ETFs offer the possibility of investing broadly and cost effectively, but even with one a shareholder must have the discipline to buy and sell following strict rules.  Also, ETFs have an often unnoticed, but not unimportant disadvantage:  The weighting follows the Market weighting, which means that stocks which have performed well in the past are overly weighted and stocks which haven’t performed well are under weighted. The expert’s call this type of behavior is called pro cyclical and it should be avoided when possible.

A comprehensibly structured portfolio based on scientific findings of the functioning of the stock market with rule based rebalancing of the portfolio is provided by the strategic asset management department of YPOS Financial Planning. Regular information on the strategy will enable investors to understand the developments and maintain the long-term strategy even if someone has once again found a new supposedly revolutionary chart.

Über den Autor

Lisa Hassenzahl ist Geschäftsführerin der YPOS Finanzplanung GmbH und Gründerin des ersten Family Offices für Frauen, Her Family Office. Bereits seit 2015 ist sie Certified Financial Planner und bietet eine Beratung, die Fragen der Kapitalanlage und der Vermögensstrukturierung mit rechtlichen sowie steuerlichen Aspekten verknüpft.