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Learning from the past

Learning from the past

Looking forward to recovery means thinking back to what went wrong before during financially hard times


By Trevor Kiedan
When it comes to the world economy, our own investments, and future financial well-being, we must remember to take heart from history.

After all, despite the doom and gloom that surrounds us, we must remember that this is not the first time that the world's economy has taken a tumble. Nor will it be the last.

One only has to tune in to almost any business program or newscast segment to hear comparisons of our current economic situation to the stock market crash of 1929.

In October 1929 mass panic triggered a huge selloff of stocks on the Dow Jones. In just two days the Dow Jones Industrial Average experienced a massive fall of 25 percent. By 1932, most blue-chip stocks had lost about 80 percent to 90 percent of their value.

A detailed look at the events that transpired show that by September 3, 1929, the Dow Jones share index hit an all-time high of 381 points.

Then, on October 24, investors became nervous about the state of public finances, triggering a bout of heavy selling on what became known as "Black Thursday". A day later US President Herbert Hoover, in a bid to quell the panic and boost confidence, claimed that "the fundamental business of the country ... is on a sound and prosperous basis". But five days later panic set in as more than 16 million shares were traded. Finally, on November 13, the market reached bottom and started to recover.

Although there are similarities with then and now, a lot of lessons have been learned from the crash of 1929 and the subsequent Great Depression.

One of the main lessons learned during the crash was that the financial markets, the banks and Main Street are all inextricably linked. This is to say, for example, that a banking crisis will filter through to the housing sector or even the business sector. This appears to be what is happening today as people find it difficult to borrow money for mortgages or for business loans.

There are those who say that the global economy will begin to recover by 2010.

Another lesson is that such a crisis requires fast government intervention. Even in the past few days the US Senate held a rare weekend session to discuss President Barrack Obama's stimulus package worth hundreds of billions of dollars.
Yet another lesson learned is that, in times like these, countries must avoid the temptation of applying protectionism, which was discussed at the World Economic Forum at Davos, Switzerland. World leaders such as the United Kingdom's Prime Minister Gordon Brown called upon countries to resist the urge to introduce protectionist policies.

So, while governments around the world are applying the lessons that they have learned from history to the current global financial crisis, we - as investors - should too. And one of the main lessons is that periods of uncertainty and volatility are followed by periods of recovery.

If we take a period of 25 years from 1983 to 2008, we will notice that there have been numerous periods of crisis and volatility. A period more recent than the Crash of 1929 was the stock market crash of 1987 caused by panic selling. The Dow Jones Industrial Average lost almost one-quarter of its value in a few hours on a day that became known as Black Monday. This was a short-lived crash - the next day the index rose by more than 100 points.

According to investment management firm Blackrock, "the case for investing in equities remains as strong today as it has ever been for those investors with a long-term investment horizon".

Historically speaking, the Dow has risen considerably since it started trading at the end of the 19th century, and an increase looks likely to continue despite dips like the one we are experiencing now.

Although it is difficult to predict the end of the downturn, there are those who say that the global economy will begin to recover by 2010.

With this in mind, those of us with a long-term view can take heart in history.

Trevor Keidan is managing director of Infinity Financial Solutions.

Contact him at [email protected].


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