Stock Market Crashes (1929-2020): Lessons to Learn

• 10 min read

A look at past stock market crashes, their causes, and lessons we can learn from them.

I got a great question a couple weeks ago from a subscriber:

Hi Nathan. If you could expand on the case for and the case against us being in a bubble right now and the stock market coming crash. [I] see all the talking heads right now talking about us being in a bubble.

Last week, we looked at the first financial bubble in tulips, of all things.

Wall Street Crash of 1929

The 'Great Crash' began in September and ended with a bang on October 28th and 29th. On those two trading days alone, the Dow Jones Industrial Average dropped by 23%.

The crash signaled the beginning of the Great Depression. After the crash, the Dow Jones Industrial Average continued to fall. It declined by 85% top-to-bottom as the Great Depression devastated the US economy and stock markets.

Photo credit: Sonder Quest

The Great Depression wasn’t caused by the 1929 crash, but that certainly didn’t help matters. The early 1930s saw the US economy’s most severe recession ever. Unemployment reached 25%2; for reference, the COVID-19 crisis never saw unemployment reach even 15%.

What happened? There were two main causes:

1. Too much optimism

After World War I, the US entered a period of substantial economic expansion. The ‘Roaring 20s’ had led to overproduction in all kinds of areas. Consumers took on more debt than they could afford.

Stocks did well in that environment; the Dow Jones increased by 20% per year from 1922–29.1 Investors were lulled into a state of apathy; they thought the economy was in a permanent state of growth and that stocks would continue to go up in perpetuity.

And when you think stocks are going to go up forever, what to you do? Well, try to magnify your gains, of course. That brings us to cause #2.

2. Debt

Margin had been created just a few years before the 1929 crash. That allowed investors to borrow money to buy stocks. A $10,000 could be multiplied to $50,000. That magnified the gains; it also magnified the losses substantially.

Investors who had leveraged up were forced to sell their stocks to satisfy lenders; that led to even more losses and further selling.

Lessons from the 1929 Crash

There were a few lessons from the 1929 market crash:

  1. Excessive optimism is your signal to become cautious. Anytime there is widespread belief that stocks or any asset (including cryptocurrency) will always keep growing, bad things are right around the corner.
  2. Leverage is dangerous. If you had been leveraged in the 1920s, you would have made a lot of money. Unfortunately, the lures of quick riches led to many fortunes evaporating just as fast. A $100,000 investment in 1929 leveraged 3x would’ve lost $55,000. After just 2 days, more than half of your investment would be gone. That would take a 119% return just to break even again. Tread carefully.
  3. Stocks are for long-term money only. A final lesson to be learned from the 1929 crash and subsequent Great Depression is that owning stocks can be stomach-churning over short periods (less than 5 years). The Dow Jones Industrial Average fell by 85% from top-to-bottom. It eventually recovered and wen ton to generate huge gains, but it took more than a decade for 1929 investors to recover their losses.

Black Monday Crash of 1987

Fast forward 50 years to 1987. Things have changed dramatically since the 1930s. Computerized trading allowed brokers to place orders faster. And the US was in another time of economic growth and prosperity. Up to August 1987, the S&P 500 index was up 44%. Everything was smooth sailing.

Then October 19th happened. The Dow dropped more than 22% on October 19th alone.3

Market historians still aren’t quite sure what happened. There was no recession before or after; there was no clear warning signals that the market was about to collapse.

The most likely situation was that investors had placed the equivalent of stop-loss orders into computers. As the market fell, it triggered these automatic sales; that caused stocks to drop even further, and the cycle continued. That led to a full-on panic.

As a result, the SEC implemented circuit breakers to halt trading for 15 minutes or up to the entire day so that investors can maintain calm and rationality (hopefully) and avoid the October 1987 situation from happening again.

The Lesson from 1987

There is probably one lesson from 1987. And it’s an important one: You can’t predict a market crash.

Economic data was great; the market was doing well. There was surely nothing anyone could have seen to predict what happened in October 1987. Even today, investors don’t know exactly what happened.

If we don’t know today what happened then, how can you know ahead of then what was going to happen? You couldn’t; and you can’t. Stop trying to predict the next crash. No one can.

Japan’s 1992 Asset Bubble Burst

In the 1980s, Japan’s economy was white hot. The stock markets and real estate markets were incredibly lucrative for those that invested in them. Unfortunately, things got excessive.

The party ended in 1990.

By August 1990, the Nikkei index fell by 50%4 and it took decades for the market to recover. If you had investing January 1990 and reinvested all dividends, your return as of December 2020 would have been a total of 9.4%.5

That’s not annualized. $100,000 grew to $109,400. After 30 years.

The Lesson from Japan

The lesson here is valuations matter. Japan’s CAPE ratio (simply the price divided by average 10-year earnings) reached nearly 100 in the late 1980s.6

For reference, the much-maligned US CAPE ratio is now at 37. It reached just under 45 during the Tech Bubble of the 2000s.7

Source: Shiller PE Ratio (access at:

To put that into context, if the US stock market would reach the same CAPE ratio that Japan saw, the S&P 500 would need to go to over 10,000 to match that relative level (it’s now at 4,222).8

If you buy stocks at obviously nosebleed prices, you’re not going to do well. Next week, I’ll run an analysis using my own flavor of the CAPE ratio concept combined with current interest rates to see whether the S&P 500’s price today is in a “bubble” or not.

Technology Bubble of 2000

In the 1990s, the internet was changing our lives and the stock market was going crazy. The theory was that these companies were going to be hugely successful and we were in a ‘new era’ of economic progress.

Investors (rightly, by the way) believed that the internet was the “next big thing.” It was the next big thing, but the optimism about what that meant for companies' future earnings was way too optimistic.

There were 12 large cap stocks that went up more than 1,000% in the decade. Qualcomm increased 2,500%.9 Anything with “.com” after its name would surge after its IPO - regardless of whether the company had any real business or not.

Then the bubble burst. From early 2000 to October 2002, the Nasdaq fell by more than 75%.10 Stocks like,, and went out of business.

Lessons from 2000

The interesting thing about 2000 is that investors actually got the story right.

The internet did change our lives. If you would go back to 2000 and tell people that we would have small computers in our pockets that had enough power to launch a NASA space craft, they would’ve been surprised.

The actual result of technology was better than even the most optimistic person could have imagined in 2000. Yet, investors in these technology stocks lost money for decades.

Once again, we see that valuations matter. They always matter.

This reminds me a lot of the recent craze surrounding ‘disruptive innovation’ – which has always been around; it’s not a new thing.11 The idea that electric cars are the future (probably true) doesn’t mean that Tesla is worth more than every other automaker combined.

The future of the US auto market may be electric vehicles, but that doesn’t mean that Tesla (nor their investors) are going to make any money. The key question is always: what are the future cash flows of this business discounted back to today?

If those discounted cash flows are greater than the current market value of the stock, then it’s a buy. If not, then you can lose money even if you got the story right. It’s not just the story; it’s the price you pay for that story that matters just as much.

Subprime Mortgage Crisis of 2007–08

Banks were loaning money to unqualified homebuyers and fueling an incredible rise in the value of homes. To justify lower quality loans, there were new investments created that bundled a bunch of mortgages together.

The theory was that if you bundled a bunch of terrible mortgages together, they were ‘diversified’ and, therefore, were worthy of investment-grade credit ratings.

It turns out that was wrong.

When borrowers started to default and property values fell, the investments based on them (including some that were heavily leveraged) also failed. The market declined starting in 2007 and continued into 2009. From the top in October 2007, the S&P 500 declined over 55% through May 2009.12

Lessons from the Great Financial Crisis

Those that forget history are doomed to repeat it. The US clearly forgot about 1929. The exact same things happened; it was just different characters.

There were so many lessons here.

  1. Debt and speculation. Once again, we see debt and excessive speculation. Only this time, the speculation was not about stocks; it was about homes. Homebuyers thought that home prices would always go up, so they bought increasingly more expensive homes (and other real estate properties).
  2. Diversification doesn’t save you. There is a lot of hype about diversification. I understand that it’s important to diversify, but things can get taken too far. 2008 teaches us that 1,000 high-risk investments may be less risky than 1 high-risk investment, but it’s still risky. Far better to own a few truly great companies and avoid the garbage.
  3. Watch incentives. Banks were making money hand-over-fist on mortgages, so they were expanding their loan portfolios. They didn’t worry about the risks because they were repackaging them and selling them to other people. They were getting all of the rewards of selling new loans while bearing none of the risks associated with them. That’s a recipe for disaster.

COVID-19 Crash of 2020

And, of course, readers of this article when it’s published (2021) will be familiar with last year’s COVID-19 crash. For those of you reading this years in the future, the entire global economy shutdown to prevent the spread of COVID-19 (which hopefully is no longer around as you’re reading this).

Unemployment hit nearly 15% in April 2020 and the S&P 500 US stock index declined by over 33% within 2 months.

Lesson from COVID: The Black Swan

If you see 1,000 white swans in a row, does that mean there are no black swans? Not necessarily.

Photo credit: Marvin Rozendal

If the US economy is chugging along, interest rates are low, inflation is in check, and the stock market is consistently chugging out gains with no volatility, does that mean you won’t get a bear market?

Not necessarily; 2020 taught us that.

Predicting the economy and stock market is probably a futile exercise. No one saw it coming in February 2020. And no one could’ve expected that the best performing stocks out of COVID would be internet stocks with negative earnings; meanwhile, high-quality companies with huge cash flows like Disney (DIS) and TJ Maxx (TJX) would suspend their dividends.

Lessons from All Past Crashes

Let’s try to wrap this up into a few common denominators:

  1. Bad things (eventually) happen when you leverage your investments. Leverage magnifies gains and losses. It creates fragility in the system. When people are living on razor’s edge of what they can afford, even a small drop in income can lead to bankruptcy. When investors are leveraged, they risk losing 75%+ with one or two bad months (and if you think you can get out of the way before that happens, see 1929 and 1987). You’re playing with fire.
  2. The future is in the future; it’s unpredictable. Very few of these markets were predictable. Some were hard to sort out even after the fact (1987). Others happened so quickly that there was no way to prepare or predict them (1929, 1987, 2020). Black swans, technological glitches, etc. can all cause markets to go haywire. If you’re portfolio depends on accurately forecasting the market, you’re in trouble. You’re far better to invest in the types of companies that can withstand any market environment that comes rather than trying to forecast which environment we’re going to get.
  3. Avoid the crowd. If you hear others talking about an investment that ‘can’t lose’, you should be careful. And if you have an investment in your portfolio and don’t know how you can lose money on it, that’s a huge red flag. Where there is too much optimism, prices are going to be bid up well above what the underlying asset can reasonably sustain. Bitcoin and other cryptocurrencies were there (and still are, in my opinion). Tesla was there (probably still is). ARKK was there.

What is the Fair Value of the S&P 500?

I’m going to take things a step further next week in Part III (premium subscribers only). I’ll update my valuation model for the S&P 500 and tell you where I think (actually, where the data thinks) the market should be trading at based on today’s earnings and interest rates.

If you have any feedback, I'd love to hear from you. Just reply directly to this email. Have a great weekend!


  1. Reisner, Rebecca. “8 of the Biggest Stock Market Crashes in History — and How They Changed Our Financial Lives.” Business Insider, Accessed 1 June 2021.
  2. Reisner, Rebecca. “8 of the Biggest Stock Market Crashes in History — and How They Changed Our Financial Lives.” Business Insider, Accessed 1 June 2021.
  3. Reisner, Rebecca. “8 of the Biggest Stock Market Crashes in History — and How They Changed Our Financial Lives.” Business Insider, Accessed 1 June 2021.
  5. “Nikkei Return Calculator, with Dividend Reinvestment.” DQYDJ – Don’t Quit Your Day Job…, 15 May 2016,
  6. “在庫バブル.” The Irrelevant Investor, 10 Aug. 2017,
  7. Shiller PE Ratio. Accessed 1 June 2021.
  8. Assuming a CAPE ratio of 95 at Japan’s high divided by current US CAPE ratio of 37 * current S&P 500 price of 4222.
  9. Reisner, Rebecca. “8 of the Biggest Stock Market Crashes in History — and How They Changed Our Financial Lives.” Business Insider, Accessed 1 June 2021.
  10. Reisner, Rebecca. “8 of the Biggest Stock Market Crashes in History — and How They Changed Our Financial Lives.” Business Insider, Accessed 1 June 2021.
  11. Consider how the automobile disrupted horses
  12. "S&P 500 Total REturn Index History: Drawdowns of Greater Than 5% Snice Index Pre-Crisis Peak. Accesssed June 1, 2021 from: "–12–2020%20Item%209%20S%20and%20P%20500%20Index%20Drawdown%20Chart.pdf
← What Is the S&P 500's Fair Value? [June 2021 Update]
Is the Stock Market in a Bubble? Part I: Tulips →

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