Signs of Trouble

As President Herbert Hoover took office in 1929, the stock market was booming. Indeed, the country was in the grip of a speculative mania, a bull market that had begun in 1927 and showed no signs of quitting. Many small investors had bumped into the market, often buying stocks “on margin” (i.e., on credit), betting that a rise in price followed by a quick sale would invariably net them a quick and easy profit. It seemed like a sure thing. Stocks became wildly overvalued, selling at prices far beyond any relationship to earnings or fundamentals. Caught up in a classic economic bubble, they forgot what every wise investor needs to remember: no boom lasts forever, markets fluctuate, and what goes up must eventually come down.