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WARREN BUFFET STORY PART 3 | The Buffett Family during the Great Depression

Updated: Jul 28, 2023

Are you aware of the year in American history that experienced the most severe economic downturn?

In the last article, we delved into the historical background of the Buffett family. In this subsequent piece, we will explore the contents and themes portrayed in the book "A Tale of Two Cities."

At Buffett Online School, we believe in investing in great companies that you understand, and utilizing Free Investing Resources to kickstart your investment journey is one of the best ways to learn.

"It seemed to be the best of times but also the worst of times."

Just as with the COVID-19 pandemic, history often exhibits patterns of repetition. Considering this, what obstacles do you anticipate contemporary Americans and the Buffett family may encounter?

The response to the previous inquiry lies in 1929, which marked the beginning of Warren Buffett's life. Since then, numerous economists have extensively examined the fluctuations and cyclical nature of the global economy.

The narrative begins a bit earlier, in 1920 when the U.S. stock market experienced a period characterized by the presence of speculative bubbles.

During that time, a significant number of ordinary individuals, including Warren Buffett's father, Howard, were enticed by the allure of the stock market and its potential for financial gains. Howard, in fact, resigned from his job at the newspaper and pursued a position as a stockbroker at Union State Bank. However, this decision had profound repercussions and inflicted considerable anguish upon him.

Before the Great Depression, the United States experienced a frenzied atmosphere of stock buying. Whether in large cities or small towns, there was an abundance of securities salesmen actively enticing people to enter trading rooms and invest in stocks. Moreover, numerous "professionals" took to public spaces to elucidate the advantages of participating in the stock market.

Regrettably, these individuals neglected to adequately caution the public about the inherent risks associated with investing. Consequently, the stock market transformed into a nationwide phenomenon akin to a sport, intensifying the culture of American utilitarianism and an obsession with wealth accumulation to an alarming extent.

At the stock market's peak, Leila, Warren Buffett's mother, was pregnant with him. During that time, there was a prevailing belief that purchasing stocks was the easiest and quickest means of amassing wealth. Stocks seemed to offer an unlimited source of financial gain, leading many individuals to invest all their available cash to acquire as many stocks as possible.

Due to the strong upward trajectory of stocks, the majority of the public became involved in short-term trading, focusing solely on capitalizing on price differentials to generate profits. There was a lack of attention toward the underlying enterprises associated with the stocks being purchased. However, in financial markets, a burst is inevitable when the bubble expands far beyond what is warranted by actual economic development.

During that period, the prevailing trend witnessed numerous stockholders resorting to borrowing money against their existing stocks to finance the acquisition of additional shares. However, when stock prices suddenly plummeted, they found themselves compelled to sell more shares in order to meet margin requirements, thus initiating a detrimental cycle where stock prices continued to decline. This scenario led to economic self-destruction, and a significant portion of the American population became entangled in this avaricious investment game.

The writer wrote about the scene in his book "Inside the Great Depression of 1929"

Even in the smallest factories, there were large blackboards where people wrote the latest trading quotes and excitedly shared the latest prices, and even the farms outside had loudspeakers to broadcast the stock market information on the radio so that everyone could buy and sell in real-time.

People desired real-time updates on stock prices, even during their commutes, and considered receiving immediate information about stocks and engaging with investment-related news as the most precious time of the day.

Howard Buffett, like many others, held the belief that America's future was promising and that the stock market would perpetually ascend, resulting in increased prosperity for all. However, the unexpected occurred in September 1929 when the opposite unfolded, and the stock market experienced a sharp downturn. These unforeseen events shattered the prevailing optimism and left many facing significant financial losses.

The price of stocks started to decline, and on October 24th, there was a significant selling frenzy that ultimately led to the official collapse of the stock market.‍

The sudden drop in the sky made it seem like it had collapsed, causing stock prices to rapidly fall to the ground. With no established criteria or restrictions for stopping the market, there was no chance for redemption and everyone was left frozen.

October 24, 1929, is a day that will forever be remembered by Americans as "Black Thursday." On this day, 650,000 shares of U.S. Steel were sold at an all-time low price of $1.79. However, no buyers stepped forward, causing the stock price to plummet without any trading activity. Consequently, all companies' stock prices began to decline one by one, resembling the spread of an infectious disease.

The stocks that held immense value yesterday have now become worthless pieces of paper. The devastating crash of the stock market led numerous investors, including company owners, stock brokers, and large-scale investors burdened with substantial debts, to contemplate suicide. The individuals who were once millionaires are now plagued with bankruptcy and debt, witnessing a swift reversal of fortune.

In the upcoming article, we will reveal how both Americans and the Buffett family managed to withstand these difficult times. Stay tuned!

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