Last week I got to wear my tuxedo!
It was for a fancy dinner celebrating Lunar New Year. The theme was the Roaring Twenties. People leaned into it. Sharp suits, bow ties, suspenders. Some of the women wore flapper dresses with fringe and headbands. Super fun event.
The Roaring Twenties theme got me thinking…
The Roaring Twenties earned its name honestly. It was a decade that seemed to hum with energy. The First World War had ended. Technology was advancing quickly. Radios were spreading into homes. Automobiles were becoming more common. Factories were booming.
These boom times had a big impact on personal finance. Credit was easier to obtain. Stock markets were rising. People felt modern, optimistic, and wealthy. For many, it felt like the start of something permanent. Prosperity was not just expected. It was assumed to be natural, automatic progression. It was taken for granted.
By the mid to late 1920s, the party felt like it could never end. Stocks had been climbing for years. Ordinary people opened brokerage accounts. They bought shares on margin. Newspapers ran stories of fortunes made quickly. Investment clubs formed in barber shops and living rooms.
It seemed like everyone had a hot tip. And since the investment markets kept going up and up and up, it also seemed like everyone was right.
There is a famous story from that period involving Joseph Kennedy, father of future U.S. president John F. Kennedy. Joe Kennedy was already a wealthy and sophisticated investor. One day in 1929, he was getting his shoes shined. The shoeshine boy began offering him stock tips.
According to the story, the young man confidently recommended several companies that were sure to rise. Kennedy listened. Then he walked away.
When he got back to his office Kennedy began selling his stocks. All of them, liquidating his entire portfolio. His reasoning was simple. If the shoeshine boy was giving investment advice, speculation had reached a dangerous extreme. When people far removed from financial markets believe they have easy answers and can’t miss investments, it often means the cycle has gone too far.
By 1929, taxi drivers, shoeshine boys, and neighbours were all discussing stocks with certainty. The belief that markets only went up had become widespread. Caution was dismissed as pessimism. Valuations no longer mattered. Earnings no longer mattered. The idea that the party might end felt almost ridiculous.
But then it ended. Big time.
The market began to crack in October 1929. What followed was not just a normal correction. It was a collapse. Stocks fell sharply, then recovered briefly, then fell again. Margin calls forced investors to sell into a falling market. Banks failed. Credit dried up. Businesses closed. Unemployment surged.
The Great Depression followed and lingered for years. The optimism of the Roaring Twenties gave way to bread lines and hardship. It was a reminder that markets can move in cycles and that excess, when left unchecked, often carries a price.
I am not saying that a crash is coming. In fact, earlier today I was laughing at something I saw that was mocking a very popular financial guru who has been calling for a crash for the last 14 years. Hey, sooner or later he will be right.
What I am getting at is I think people being unjustifiably overconfident in their own investment expertise is happening more than ever in the age of social media. How many times have you heard someone in the lunchroom at work confidently extoll the virtues of silver, or cryptocurrency, or meme stocks. But the thing is, you work in a warehouse, or a school, or on a drilling site.
To be clear, I am not besmirching any other profession. I am also not saying that these folks are dumb, or not good at their own job. I am only saying that they might not be very good at mine.
When it comes to investing, they may be the modern equivalent of the 1920s shoeshine boy. They are passing along something they heard. They are repeating the latest story of easy gains. They are convinced that this time is different. But that doesn’t mean that they are right.
To be clear, I am not saying they are wrong either. There are lots of informed, knowledgeable people out there. That’s not really what I am getting at.
It’s the shoeshine boy scenario that I want to highlight. When everyone thinks they are an expert. Even the ones that clearly are not.
Financial planning is about articulating your Great Goals in life, and making decisions that are consistent with achieving them. That probably does not include taking investment tips from the shoeshine boy.
Brad Brain. CFP, R.F.P., CIM, TEP is a Certified Financial Planner in Fort St John, BC. This material is prepared for general circulation and may not reflect your individual financial circumstances. Brad can be reached at www.bradbrainfinancial.com.
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