What Gann Said About 1929
And What it Means to Us Today
By Romeman
"Once stock prices reach the point at which it is hard to value them
by any logical methodology, stocks will be bought as they were in the
late 1920s – not for investment, but to be unloaded at a still higher
price. The ensuing break could be disastrous because panic psychology
cannot be summarily altered or reversed by easy-money policies."
-- Alan Greenspan, 1959 [1]
Although he died more than four-and-a-half decades ago, the work of market analyst William Delbert Gann – or "W. D.," as he liked to be called – is still being studied by a coterie of admirers.
Little wonder, since he is reputed to have taken some $50 million – in 1950s dollars – out of the stock and commodities markets through his methods of trading and analysis. [2] His techniques – including Gann Angles and his fabled Gann Wheel or "Square of Nine" – are still being used by people ranging from hedge-fund managers to individual traders.
Gann was active in the markets over a period of about 50 years, including the (up-to-then) unprecedented buying spree of the Roaring Twenties and the panic selling of the Depression-era Thirties.
What did he have to say about that period in our nation’s history? And can we learn something of value from it as traders and investors today?
Gann wrote several books and courses about the markets, including a novel, entitled The Tunnel Thru the Air, which he said contained "a valuable secret, clothed in veiled language."
In his novel, he wrote: "I believe it is the duty of any man who understands science and mathematics and the cycle theory, and knows what is coming, to warn the people in order that they may prepare for trouble ahead. Many will scoff and laugh and refuse to believe until it is too late." [3]
A few months ago while researching past market behavior, I stumbled across what appears to be a disturbing cycle. This one is not explicitly mentioned in Gann cycle theory, to my knowledge, but the evidence for its existence seems compelling.
If you go back in 72-year increments from 2001, you will find important banking panics and/or crashes in the American stock market in 2001, 1929, 1857, and 1785 (which were not limited to a single year, but continued over a period of years after the initial break):
2001: Between mid-May and mid-September 2001, the Dow Jones Industrial Average plunged from around 11,300 to around 8235, shedding more than 25% of its value before rebounding.
1929: On Oct. 24, the Dow Jones Industrial Average lost 9 percent of its value in a single day, which became known as Black Thursday. The crash heralded the beginnings of many riches-to-rags stories and ushering in the Great Depression. Gann writes, "The 1929 stock market panic was due largely to money conditions brought about by overextended loans and undigested securities." [4]
1857: Aug. 24, the "Central America," a ship laden with massive amounts of gold from California, was lost at sea. This event precipitated a run on the banks, leading to a three-year depression. [5] Gann writes, "The 1857 panic was one of the worst in history up to that time. This was again due to too much paper money in circulation. For every dollar in gold and silver, there was about $8 worth of paper money circulating. There were a large number of bank failures and banks had to suspend payments." [6]
1785: Although this crisis goes back to before the existence of the New York Stock Exchange and even of the United States Constitution, there were economic problems in the American colonies so severe that they led to depression and were known as "the panic of 1785." We are told that around this time "several of the States began to issue paper money; and this was in addition to the enormous quantities of paper which had been printed during the Revolution and which was now worth but a small fraction of its face value." [7]
A reading of these facts leads to some sobering questions. Do we have any worthless paper money in circulation today or are we in pretty good shape? Are personal households, businesses, banks, and nations overextended when it comes to loans, mortgages, credit cards, debt, and deficits, or do we have nothing to worry about? Is the worst really over in the markets and the American economy or does it still lie ahead of us?
"History repeats itself," Gann writes in The Tunnel Thru the Air. "My authority for stating that the future is but a repetition of the past is found in the Bible. Read Eccl. 1:9: ‘The thing that hath been, it is that which shall be; and that which is done, is that which shall be done: and there is no new thing under the sun.’ Again ‘That which has been is now and that which is to be hath already been.’ This makes it plain that everything works according to past cycles, and that history repeats itself in the lives of men, nations and the stock market." [8]
Does history really repeat itself? Many commentators correctly note that a great deal has changed in American society and in stock-market regulations since the 1930s. But human nature, as Gann liked to say, remains the same.
Read this account and see if you find any parallels to the past few years:
"1929 Wall Street Panic. -- The cause of this panic was due to wild gambling not only by the people in the United States, but by people in foreign countries. The whole world was gambling in the stocks of the United States. People were buying right and left regardless of price. Fortunes were made on paper in a short period of time. Everybody from the chambermaid to the multi-millionaire was in the stock market. People had ceased to work and were watching the stock ticker. New millionaires were being made in short time. People had neglected their business because they thought it was easier to make money in the stock market. Never was there a time in history where a speculative wave was more overdone than this one. Brokers' loans continued to mount until they reached over 8 billion dollars. It has been conservatively estimated that the total loans on all stocks outstanding in the United States exceeded 30 billion dollars." [9]
What would Gann say about the situation today, in the Spring of 2002? Is the worst over? Are we perhaps going to continue in a period of choppiness in the markets for a while longer, and then a brighter future will dawn, with prices spurting higher in a spectacular new bull market?
Based on what Gann wrote, I believe he would say today that the situation is destined to grow worse than anything we have seen so far – that what we have witnessed up to now has been only a mild bear market in comparison to what is coming.
Note that:
The real damage to the Dow Jones Industrial Averages did not occur during the initial leg down in 1929, but in the 813 days between April 17, 1930 and July 8, 1932, when the Dow dropped a phenomenal 86%! If you had bought and held the Dow from the high of 1930, when it looked like it might be rallying, it would have taken you more than 20 years just to break even again, let alone make a profit. It took about 25 years for the Dow to return to its 1929 high. [10]
As we have seen, according to my research, financial panics have hit the US in 72-year cycles that have gone on for several years after the initial catalyst. And each of these has been successively worse than the one before it (i. e., 1857 and the years following were worse than 1785 and 1929 and the years following were worse than 1857).
Let us try to intuit where in "the cycle" we might be today.
In his book New Stock Trend Detector, Gann quotes a lengthy prediction he made just after the 1929 crash, which reads in part:
"The coming investors’ panic will be the greatest in history, because there are at least 15 to 25 million investors in the United States who hold stocks in the leading corporations, and when once they get scared, which they will after years of decline, then the selling will be so terrific that no buying power can withstand it."
He then goes on to say:
"It is a matter of record that the panic of 1931-1932 was the greatest in history with the most severe declines ever recorded in the history of the New York Stock Exchange. This prediction was based on my Master Time Factor, which enables me to tell months and years in advance when certain time cycles repeat and cause extreme high and low prices. This is enough to convince any man that my discoveries, based on mathematical science, can be depended upon to forecast future market movements.
"HOW TRADERS AND INVESTORS WERE FOOLED IN 1930
TO 1932 PANIC
"Investors and traders lost money in this great panic because they listened to other people who knew less about the market than they did and who were simply guessing. Many a so-called wise economist said that the bottoms in November, 1929, would not be broken and that this decline had corrected all the weak spots in the market and that the bull market would be resumed. They said the same thing about the breaks in 1930, 1931 and 1932. When the market actually reached bottom, they did not know what to say because they had been fooled so long. They had not studied past history enough to know that after the greatest advance in history had culminated in 1929, the greatest panic in history must follow and that it would require a long time to liquidate stocks. Every time stocks made bottom, the newspapers, government officials and economists said that it was the last bottom, but stocks went down, down, down, until people lost faith and hope in everything. They went lower than anybody dreamed they could go. That is what happens when everybody decides that stocks cannot go down or that stocks cannot go up – they always do the opposite. The public is always wrong, because they follow no well-defined rule and are not organized. People believed that the Government by buying cotton, wheat and loaning money could stop the depression, but when once a cycle is up and prices are due to decline, nothing can stop them until it has run its course. The same when the main trend turns up, neither government interference nor anything else can stop the advance until it runs its course.
"Every investor and trader should do his own studying and learn rules and apply them and not rely on other people who know no more about the market than he does." [11]
What stands out to me in Gann’s analysis is that he says the greatest panic in history "must follow" the greatest advance in history.
We know that the 1990s was the greatest bull market ever seen. If Gann is right, it is, you might say, "mathematical" that a panic is coming and that it will the worst in the entire history of the stock market. It would be the natural expression of the pendulum action of a cycle. On the other hand, if "the greatest panic in history" is not coming, then Gann theory must be flawed and we might as well call it all into question.
There may be some brief "bull campaigns," as Gann would say, and some may be spectacular, but if Gann is right, the main trend is still down and prices are eventually headed "lower than anybody dreamed they could go."
Gann describes the wrong reasoning that brought on the spiral of selling:
"The price decline from 1929 to 1932 was so drastic because people who bought at high levels held on and hoped and bought more to average on the way down. They were wrong at the time they bought the first stock and continued to be wrong by bucking the trend and buying more to average, the worst thing that any trader can do. Remember, average your profits, but never average a loss.
"After stocks had declined 100 points or more, other people began to buy stocks, because they thought they were cheap – and the only reason they thought they were cheap was because they were down 100 points compared with high levels. This was the worst reason of all for buying stocks. Later, when stocks were down around 150, 250 and 300 points from 1929 top levels, other people bought for the same reason, that they were a long distance down from the top and looked cheap. They were wrong because there had been no change in trend. The time period had not run out and the market had not given buying signals.
"If these buyers had only waited, and had known how to follow the rules laid down in my books, WALL STREET STOCK SELECTOR and TRUTH OF THE STOCK TAPE, they could have determined when the trend changed and could have bought stocks at low levels and made big profits, but most of them were buying on guesswork and hoping that the stocks would go up. Many of these people, no doubt, made up their minds to sell out when a rally came, but fixed a price at which stocks never rallied to. They hoped for a rally, but the hope was not based on any sound reasons and there was no sound reason for expecting a rally or an advance that would let them out." [12]
Of course, Gann may be wrong about history repeating itself. Or I might be wrong in my interpretation of him. Or my idea of a 72-year cycle might be wrong.
But supposing that the general argument above is right, and we are headed for a rout in the stock market, what advice does Gann give to us?
Throughout his writings, the Wizard of Wall Street warns us against falling prey to the opposing emotions of hope and fear, and he gives prescriptions for how to protect investment capital and profits. They are simple rules that we have probably all heard time and time again, but they come from a man with decades of experience in trading both equities and commodities with a high level of success and profitability.
"Never get the idea in your head that you can or will hold a stock until it goes your way. This is nothing but pure stubbornness and is not based on any sound logic or reasoning. In case of doubt, get out. Do not hesitate. Delays are always dangerous. Do as the insiders do: If they can not get what they want, they take what they can get; if the market will not take what they have to offer, they offer what it will take; if the market will not go their way, they go its way. A wise man changes his mind, a fool never." [13]
"It is well for any trader to remember that when he makes a trade, he can be wrong. Then how can he correct that mistake? By putting on a stop loss order and taking a small loss. Unless a man knows the risk he is going to take and how much of his capital he can risk on a trade, he should never start speculating. Because without knowing these fundamental rules, sooner or later the unexpected will happen and he will go broke. It is not my object in writing this book after 45 years experience, to paint a rosy picture of an easy way to get rich, because there is no easy road to riches. My object is to tell you the truth and give you practical rules that will work if you put in the time to study and have the patience to wait for opportunities to buy and sell at the right time, you can make a success. Every man takes out of life just exactly according to what he puts in. We reap just what we sow. A man who pays with time and money for knowledge and continues to study and never gets to the point where he thinks he knows all there is to know, but realizes that he can still learn, is the man who will make a success in speculation or in investments. I am trying to tell you the truth and give you the benefit of over 45 years of operating in stocks and commodity markets and point out to you the weak points which will prevent you from meeting with disaster. Speculation can be made a profitable profession. Wall Street can be beaten and there is money operating in commodities and the stock market if you follow the rules and always realize that the unexpected can happen and be prepared for it." [14]
"I feel I cannot repeat too many times the value of using stop loss orders because it is the only safety valve to protect the investor and trader." [15]
Only time will tell what meaning and value Gann’s words have for us today. As Gann himself said,
"Time is the great factor that proves all things." [16] |
