Investing During Depressions: Strategies For Success

While the Great Depression saw many people lose their fortunes, a few managed to make successful investments and grow their wealth. Some of the most notable investors who emerged from the Great Depression with more wealth than before include Joseph Kennedy, Sr., J. Paul Getty, and Howard Hughes. These individuals invested in a range of industries, including stocks, movies, liquor, oil, and aviation. Joseph Kennedy, for example, made millions in the unregulated stock market of the 1920s through insider trading and market manipulation. He then sold most of his stock before the 1929 crash and further profited by selling short, betting on stock prices to fall. J. Paul Getty, on the other hand, took advantage of the depressed oil stock prices during the crash and acquired undervalued oil stocks and real estate, building an oil empire. Howard Hughes, who inherited wealth from his father, focused his investments in Hollywood, producing movies such as Hell's Angels, and later turned his attention to aviation, forming the Hughes Aircraft Company in 1932.

Invest in precious metals like gold and silver

Gold and silver are historically coveted precious metals, recognised for their value by ancient civilisations. They are finite resources, which cannot be created, and have been used as currency and jewellery, as well as in industrial applications.

Gold is unique for its durability and malleability, and its ability to conduct heat and electricity. It is also highly resistant to corrosion. Silver shares these qualities, although it is more volatile in price due to its industrial usage.

Precious metals are a good investment during a depression as they tend to be more stable than stocks. They are a good store of value when economic and market conditions are uncertain. Gold and silver have intrinsic value, and their prices often rise during economic downturns. They are also a hedge against inflation.

There are several ways to invest in gold and silver:

• Buying physical gold or silver, such as bullion, bars, coins or jewellery.
• Buying stocks or mutual funds that invest in gold.
• Investing in gold or silver Exchange-Traded Funds (ETFs) or mutual funds.
• Buying mining stocks of companies that mine gold or silver.
• Speculating on gold or silver futures.

However, investing in precious metals does come with some disadvantages. For example, they offer slow growth compared to stocks, and there is a markup on bullion coins and bars. They may also be illiquid, and there are storage costs associated with owning the physical metal.

Focus on defensive stocks or treasuries

Defensive stocks and treasuries are a good way to depression-proof your assets. If you are worried about a depression, it is best to focus on these types of investments.

Defensive stocks are those that are in more defensive sectors, such as electric utilities or companies selling consumer staples like soap and packaged foods. These companies tend to be more stable during tough economic times because they depend on strong baseline demand rather than the economic cycle. People will still need to use electricity and buy food and other basic necessities even if the economy is struggling.

Defensive stocks also include large companies with stable profits that pay dividends to investors. Dividends are a portion of the company's profits that are paid out to shareholders. Large, stable companies that pay dividends are often more reliable investments because they have a consistent track record of performance.

In addition to defensive stocks, treasuries are also a good investment during a depression. Specifically, default-free Treasury bills and Treasury bonds are recommended. Treasury bonds did well during the Great Depression of the 1930s. When bond yields are low, bond prices go up. So, during a depression when interest rates are low, investing in bonds can be a good way to make money.

Overall, if you are worried about a depression, focusing on defensive stocks and treasuries can be a good way to protect your assets and make money. These types of investments tend to be more stable and reliable during tough economic times.

Diversify with large-cap value stocks

Diversifying your portfolio with large-cap value stocks is a recommended strategy for investing during a depression. This strategy can provide long-term gains, particularly when prices are at their lowest and inflation rates are high.

Large-cap stocks are those of well-established companies with a market capitalisation of over $10 billion. These companies tend to be more stable and less volatile than smaller companies, making them attractive investments during economic downturns. Value stocks, on the other hand, refer to stocks that are considered undervalued by the market. They have strong fundamentals but trade at lower prices relative to their earnings, revenue, or book value.

During a depression, a diversified portfolio of large-cap value stocks can be a smart move. This strategy aims to balance risk and return by investing in multiple large-cap value stocks across different industries or sectors. By diversifying, you reduce the impact of any single stock's performance on your overall portfolio.

While large-cap value stocks may not provide the highest returns during a booming economy, they can be resilient during a depression. These stocks often belong to established companies with strong track records and stable business models, making them more likely to weather economic storms.

It's important to note that investing in large-cap value stocks during a depression requires a long-term perspective. Even if stock prices drop further, historical trends suggest that they will eventually recover and deliver solid returns over time.

Additionally, governments often intervene during economic crises by injecting liquidity into the market. This can further boost the performance of large-cap value stocks, as the influx of money can stimulate economic activity and drive up stock prices.

However, it's worth noting that diversification has its limits. While it can reduce risk, it does not guarantee profits. It's also important to conduct thorough research and carefully consider your investment decisions, as not all large-cap value stocks will perform the same during a depression.

Invest in real estate

Investing in real estate during a depression can be a good long-term investment strategy. Here are some things to keep in mind:

• Timing the market: While it's generally advised not to time the market, understanding how real estate markets evolve during depressions can help you make smarter decisions. The first stage of a depression in the real estate market is a period of price discovery, where buyers and sellers need to adjust their expectations. This is followed by a period of real opportunities, where property owners look to offload failing assets.
• Location matters: The returns on real estate investments during a depression are largely dependent on location. Certain metropolitan areas may outperform others due to population growth, rent increases, and asset valuation.
• Reconsider your strategy: Investing in properties solely for value appreciation can leave you exposed if the underlying cash flow doesn't justify the purchase price. Look for cash flow deals, which can be harder to find but are still out there.
• Type of real estate: Apartments and multifamily properties have historically outperformed other types of investments during recessions. However, luxury apartments are generally less resistant to downturns than more affordable options. Single-family property investments are also worth considering, as rising interest rates may turn buyers into renters.
• Debt and liquidity: Taking on debt to invest in real estate during inflationary periods can be advantageous. However, it's important to maintain liquidity by keeping cash on hand to navigate changing circumstances and take advantage of buying opportunities.
• Long-term potential: Real estate is poised to be a good long-term investment as the economy transitions from high inflation to secular inflation. Real estate is a natural inflation hedge, and rising inflation will drive more investors towards asset-backed investments like real estate.

Buy consumer goods and the companies that make them

During an economic depression, consumer confidence falls dramatically, and people start to worry about their job security, so they pull back on spending. This decrease in consumer spending leads to a drop in business investments and a decline in production. As a result, businesses lay off workers, and the unemployment rate rises.

However, even during a depression, people still need to buy essential consumer goods like milk, bread, eggs, toilet paper, and sanitary napkins. So, investing in the companies that produce these staple goods can be a wise move. The idea is to look for companies that have been in business for several years and consistently pay dividends to their shareholders. These companies are likely to have stable fiscal numbers and could be a good bet during a depression.

For example, during the Great Depression of the 1930s, carmaker Walter Chrysler improved his market share by cutting costs, boosting efficiency, and improving passenger comfort in his vehicles. While sales of expensive cars plunged, those of Chrysler's cheaper Plymouth brand soared. Similarly, Kroger Grocery employee Michael Cullen proposed the idea of self-service stores with large selections, discount prices, and parking lots to cater to the growing number of automobile owners. When Kroger ignored his business plan, Cullen opened America's first supermarket in Queens, New York City, in 1930. By 1933, he had purchased a competing store from Fred Trump, and by the time of his death in 1936, his supermarket chain, King Kullen, had 15 locations and a loyal customer base.

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