Stock market speculation 1920s

An Unexpected Warning from a Shoe Shiner

Jan 28, 2025

Did you know that a humble shoe shiner once rattled the mighty Joseph Kennedy into selling shares just before the 1929 crash? Legend has it that when even the boy polishing his shoes started offering stock tips, Kennedy sensed an overheated market on the verge of trouble. This story brings to life an essential point: when enthusiasm for shares spreads so widely that everyone believes they are an expert, caution may be in short supply. If the entire community becomes convinced that stocks can only climb, a sudden reversal could be lurking just around the corner.

The 1920s were defined by unprecedented optimism. After the First World War, new technology and rising wages sparked dreams of endless growth. Buoyed by easy credit, countless Americans rushed to buy shares, certain that fortunes could be won with little effort. Brokers offered borrowed money at staggering levels of leverage, and many everyday citizens set aside wise planning in favour of speculation. A mood of boundless possibility gripped the public, overshadowing the steady warnings from those who felt the boom had gone too far.

Tragically, it all came crashing down in October 1929, ushering in the Great Depression. As soon as prices began to slip, panic rippled across the country, and millions struggled to salvage their investments. A careless assumption that soaring prices would continue forever led many to buy at inflated levels. Those who suspected danger and sold early escaped with their capital mostly intact or even managed to profit from the panic. This dramatic lesson from the 1920s has echoed through more recent booms, including the dot-com surge at the turn of the millennium and the housing fever in 2008. In all cases, mass euphoria set the stage for a fall that some contrarian thinkers anticipated, while the herd rushed to pour in money until the last possible moment.

Mass Behaviour: When Greed and Fear Dictate the Mood

One cannot fully understand 1920s speculation without noting the role of herd instinct. People tend to follow what those around them are doing, often putting aside their individual judgment in order to fit with the group. When newspapers and friends continuously chat about rapid gains, it is natural to feel a fear of missing out. The home that “doubles in value every few months” or the newly floated mechanical wonder that “will disrupt entire industries” becomes irresistible. Caution gets dismissed, and fresh buyers pour in money even if they privately doubt the high valuations.

The dynamic works both ways. When cracks appear, group optimism evaporates with astonishing speed. A few frightened sellers can spark a larger wave of liquidations, turning a routine dip into a harrowing plunge. Fear, just like greed, spreads contagiously. The mental picture of unstoppable gains flips into a vision of unceasing collapse. Many then sell at deep discounts, forgetting that some businesses remain solid even during turbulent times. Unfortunately, this pattern repeats time and again, from the events of the late 1920s to the more modern bubbles we have witnessed in our own era.

The great stock market rush of the 1920s revealed the power and peril of mass behaviour. So many individuals felt compelled to invest that shares soared to unreasonable peaks. When the slide arrived in 1929, the selling pressure was every bit as unreasoned, magnified by distress and dashed hopes. As studies in behavioural finance show, herd behaviour distorts decision-making because people cling to the false comfort of seeing others doing the same thing. In calmer times, one might scrutinise a company’s earnings or weigh economic factors carefully. But when the broader crowd is caught in euphoria or terror, many forget such caution, leaving them vulnerable to extremes of boom and bust.

Fear of Missing Out and the Lure of Speculation

The phrase “buy now before the price gets away” rings familiar to anyone who has encountered a market craze, and its echoes resounded in the 1920s. As cars, radios, and household electrification introduced fresh wonders, shares of related companies soared. Batch after batch of new investors, anxious not to be left behind, waded into the market. Many borrowed heavily from brokers to multiply potential gains, trusting that prices could only climb. The result was a towering market that looked stronger every day until, almost without warning, it did not.

This same fear of missing out has inspired later speculation too. Consider the dot-com bubble of the late 1990s. Companies with minimal earnings traded at enormous valuations simply because they were associated with the Internet. “This time is different,” many insisted, echoing a slogan that had also swirled around 1920s America. Eventually, the dot-com craze reached a tipping point and collapsed. Another example is the housing surge before 2008’s meltdown when the property was viewed as a guaranteed path to easy riches. Buyers and lenders alike ignored glaring risks, certain that prices would continue their upward slog indefinitely. That confidence was shattered once mortgage defaults spiked, exposing frail assumptions.

The lesson is consistent: bull markets tend to feed on themselves, driven by the human appetite for effortless rewards. Bold headlines and peer excitement can draw in people who have never considered stock ownership. As caution fades, risk often skyrockets. The trouble lies in assuming that an upswing has no natural limit and that new developments render old rules obsolete. The 1920s, with their boundless optimism, offer a cautionary mirror. Whenever the crowd believes that an era of easy money has dawned, watchfulness is likely the wiser path, especially if momentum indicators or fundamental checks hint that valuations have run far ahead of reality.

The Art of Contrarian Timing

While many fell victim to the mania of the 1920s, others navigated those years with surprising success. They achieved this by recognising a key principle: markets do not climb forever, nor do they slump without end. The real trick lies in learning to step away from extremes. In some cases, that might entail buying when the majority is consumed by panic, or pruning positions when euphoria runs rampant. Technical analysis supports these choices by highlighting moments when shares appear either overbought or oversold. Indicators like the Relative Strength Index (RSI) or the Moving Average Convergence Divergence (MACD) can flash warnings that a move has become too stretched.

For all the talk of new wonders in the 1920s, a few watchers were unimpressed by the fantastical share prices. They noticed that stock valuations had become divorced from earnings growth. Meanwhile, brokers extended credit so liberally that many trades rested on precarious margins. These sceptics did not need to predict the exact crash date; they only had to hazard that the bubble would pop eventually. By quietly selling off positions or shorting key shares before others sensed the change, they preserved capital or booked impressive profits. Such a tactic appears frequently in later incidents too. During the housing hype in 2008, some fund managers recognised that mortgage-related instruments were not as resilient as advertised, so they built positions that soared in value when the market collapsed.

Rather than aiming for a perfect forecast, contrarians often watch for signs of mass complacency or hysteria. If an RSI reading hovers at exploitable highs while news headlines reek of absolute optimism, that might prompt them to lighten their holdings. Conversely, if the MACD shows that sellers have overstayed their welcome and gloom has reached fever pitch, a purchasing spree could be profitable. Timing is never simple, and room for error remains. However, by pairing knowledge of crowd moods with clear technical signals, investors can increase the odds of acting closer to the top or bottom, rather than with the herd.

Lessons of Fear and Euphoria After the Crash

When the 1929 crash unleashed misery, shares tumbled further than most had ever imagined. Many were forced to sell investments at fire-sale prices, desperate to cover debts. Others swore off stocks for years. This highlights a pattern that occurs whenever fear overwhelms rational thought. Prices spiral downward, not always because the underlying companies are worthless, but because the emotional toll becomes too heavy for traders to bear. Anyone who had enough liquidity and courage to buy solid businesses during those deepest troughs eventually emerged stronger, though it could take years for the market to stabilise.

The 2008 meltdown provides a parallel. During that panic, even robust enterprises faced brutal sell-offs as fear enveloped the market. Yet those who held to a disciplined plan and scooped up quality assets at massive discounts were handsomely rewarded once the global economy regained its footing. Thus, whether one looks to the 1920s or modern times, fear can create unique windows of opportunity for strategic buyers—so long as they remain composed, do proper research, and avoid dramatising every headline.

Euphoria, on the other hand, exerts the opposite pressure. At the height of the 1920s craze, headlines hailed a “new era” where business cycles and recessions might vanish. Few paused to question whether share prices still matched real-world profits. Similarly, in 1999, many tech investors believed the internet age would change every valuation principle. Their enthusiasm blinded them until the dot-com bubble ruptured. The underlying concept remains: whenever a market roars upward amid glowing expectations, it pays to examine whether fundamentals justify current prices or if speculation has taken the wheel. By doing so, one can adopt a more level-headed approach, ready to reduce positions while others remain caught in the party atmosphere.

Strategies for a More Composed Mindset

The story of 1920s speculation endures because it reminds us that stock markets are powered not just by business results but also by waves of human emotion. As Shakespeare wrote, “What’s past is prologue.” Investors who ignore history risk repeating the same errors. Fortunately, there are ways to prepare for these cycles of mania and panic before they strike again.

First, an investor can guard against both greed and fear by setting predetermined rules. For instance, decide in advance how much of a portfolio to commit at various stages. If an indicator like RSI suggests extreme conditions, one might review those holdings more critically, whether that means taking partial profits or preparing to buy on weakness. This rules-based approach can reduce the impulse to chase a rising market or dump shares at the bottom.

Second, careful research still matters. Even if a stock or sector is the talk of the day, one should examine whether earnings, revenue growth, and other key data align with the current valuation. The 1920s mania saw countless individuals borrowing heavily to invest in companies without checking their financial solidity. Similarly, during the dot-com and housing booms, many leapt in purely because they observed others doing so. Keeping a calm mind and turning a critical eye on the details separates the self-directed investor from those swayed by the crowd.

Third, watch both economic signals and public mood. If newspapers consistently trumpet that share prices will never go down again, it may be time to question whether we are near an extreme. By contrast, if everyone you know is dumping shares out of despair, try to see if there is some genuine value overlooked by all. Just like Joseph Kennedy’s famous shoe-shine encounter, the everyday vibe can hint when normal logic is overshadowed by mania or dread.

The Great Crash of 1929 may feel distant, but its lessons resonate today. Herd thinking, fear of missing out, and emotional trading remain hallmarks of high-risk markets. While technology and regulations have changed drastically, the primary ingredients are still people who can fall prey to their own hopes and fears. A shrewd investor, guided by the historical record, invests with eyes open, aware that bull runs never last forever and that fearful sell-offs sometimes offer the best deals.